Contracts Flashcards
Contracts Analysis Steps
- What law applies?
- Was k formed?
- Was k enforceable?
- What does k mean?
- Excused performance?
- Breach of k?
- Remedies
- Liquidated damages?
- Third-party beneficiaries?
Contract Formula
K = MA (O+A) + C - D
Contract = Mutual Assent (Offer+Acceptance) + Consideration - Defenses
Express K
promises are communicated by language
Implied K
parties’ conduct indicates they assented to be bound
Quasi-K
NOT a K at all; one party is unjustly enriched at expense of other party, so that the enriched party must pay restitution to other party equal to unjust enrichment
Bilateral K
Exchange of mutual promises - a promise for a promise; Bilateral K offer can be accepted in any rx way. Unless expressly indicated otherwise, assume bilateral.
Unilateral K
Offeror requests performance rather than promise. Offeror (promisor) promises to pay upon completion of requested act by promisee.
Once act is completed –> K formed
Unilateral K requires full performance occurs only in (2) situations:
- Offeror clearly indicates completion of performance is the only manner of acceptance; and
- Offer to the public such as a reward offer.
Magic words = “offer… only by” or a reward offer
Void / Voidable / Unenforceable
Void = K w/o legal effect; cannnot be enforced by either party
Voidable = one or both parties may elect to avoid w/ defenses
Unenforceable = valid K but not enforceable due to defense
Common Law vs. UCC
- UCC governs sale of most tangible goods
- CL governs everything else
Merchant vs. Non-Merchants
Merchant is one who regularly deals in goods of the kind sold or who otherwise by their profession holds themselves out as having special knowledge or skills as to the practices/goods involved.
Article 2 provisions dealing w/ general business practices (SoF, confirmatory memos, firm offers, modification) –> almost anyone in business can be deemed a merchant
Some Article 2 provisions (implied warranty of merchantability) –> narrower and require a person to be a merchant w/ respect to goods of the kind involved in the subject transaction
Non-Merchant if sales are solely personal
K involving goods and nongoods
Determine which aspect is dominant and apply the law governing that aspects.
But if K divides payment b/w goods and services, apply Article 2 to sale portion and CL to service portion
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Good Faith Fair Dealing (GFFD)
Every k within ucc imposes obligation of gffd in performance and enforcement. It means honesty in fact and observance of rx commercial standards.
CL also imposes gffd - breach of duty usually involves exercising discretion in way that deprives other party the fruits of K
Offer
An offer is a communication to the offeree that creates a reasonable expectation in the offeree that the offeror is willing to enter into a contract on the basis of the offered terms. Its terms should be certain and definite. Under the UCC, the key term for an offer to be sufficiently definitie is the quantity term, and all other terms may usually be filled by the court. Under Common Law, description of the land and price must be included.
Notably, adverisements are usually construed as invitations for offers.
Offer - Standard
Objective reasonable person POV, not subjective
Advertisements (Offer & Exception to Rule)
Not an offer; Mere invitation for offers
Advertisements can be an offer if contains:
COP
(1) Certain or definite terms;
(2) Offeree is identified; and
(3) Promise.
Preliminary Negotiations
Not an offer
Price Quotations
Not offers, but can be if given in response to an inquiry that contains a quantity term
Factors considered for intent to enter into a K
- Language;
- Surrounding circumstances;
- Prior practice and relationship of parties.
Offer - definite & certain terms
Inquiry is whether enough of essential terms have been provided so that a K including them is capable of being enforced
- Identification of offeree
- Definiteness of subject matter
Definiteness of subject matter - requirement for specific types of K’s
- Real estate transactions - Must identify land and price terms, courts will not supply missing price term
- Sale of goods - Quantity term must be included (courts cure other info by gap filler)
- Employment and other services - If duration not specified in offer of employment K, can be terminable at will of either party. For other services, nature of work to be performed must be included in offer.
Requirements & Output K
- Requirements K - Buyer promises to buy from a certain seller all goods buyer requires and seller agrees to sell that amount to buyer
- Output K - Seller promises to sell to a certain buyer all of goods that seller produces, and buyer agrees to buy that amount from seller
- Assumed that parties will act in good faith so there can’t be a tender or demand for a quantity unrx disproporionate to:
(1) Any stated estimate; OR
(2) In absence of a stated estimate, any normal or otherwise comparable prior output or requirement. - On exam, watch out for words = require, need, produce, all, only exclusively, solely.
Missing Terms (Price, Time, Vague Terms)
The fact that one or more terms are left open does not prevent formation of K if it appears that parties intended to make a K and there is a rx certain basis for giving a remedy. Majority jx and article 2 hold that court can supply rx terms for those that are missing :
1. Price = except for K for real property, failure to state price doesn’t prevent formation of K if parties intended to form K w/o price being settled. For sale of goods, A2 provides that price will be a reasonable price at time of delivery
2. Time = if agreement doesn’t specify time in which act is to be performed, law implies it is to be performed within rx time
3. Vague Terms = presumption is parties’ intent was to include rx term goes to supplying missing terms. Presumption cannot be made if parties have included a term that makes K too vague to be enforced. But uncertainty can be cured by part performance that clarifies vague term or by acceptance by full performance.
4. Terms to be agreed on later = if term is material, offer is too uncertain
Material Term is Vague or Ambiguous = Offer?
NO valid offer. Neither under UCC or CL.
Watch for terms: appropriate, fair, reasonable… all signal a possible vague problem
Communication to Offeree
To have power to accept an offer, offeree must have knowledge of offer; proposal needs to be communicated to them
Termination of Offer - 4 Methods
- Lapse of time;
- Revocation;
- Rejection;
- Death.
Lapse of Time - Offer
- Offeree must accept offer within specified or reasonable amount of time
- Reasonableness is a question of fact that depends on all circumstances at time the offer and attempted acceptance are made
- If separated by more than a month, raise the issue of whether the offer is still open to accept
Rejection of Offer (Types & Effective Time)
- Express rejection
-
Counteroffer = offer made by offeree to offeror that contains same subject matter as original offer but differs in its terms.
Note –> mere inquiry does not terminate the offer; the test is whether a rx person would believe that the original offer had been rejected. - Conditional Acceptance = when acceptance made expressly conditional of new terms, it’s a rejection of offer. The conditional acceptance is a new offer and original offeror may form K by expressly assenting to new terms. But that offer that results from conditonal acceptance CANNOT be accepted by performance. If parties ship or accept goods after a conditional acceptance, K is formed by their conduct and new terms are NOT included.
Effective when RECEIVED by offeror
Is rejection of / counteroffer to Option K termination of offer?
NO. Rejection of or a counteroffer of option K does NOT constitute a termination of offer. Offeree is still free to accept orignal offer within option period UNLESS offeror detrimentally relied on offeree’s rejection
Revocation (Types & Effective Time)
- Only offeror can revoke
- Offeree MUST be aware of revocation
- Types: Direct; Publication; Indirect
- Indirect if offeree receives (1) correct info (2) from reliable source (3) of acts of offeror that would indicate to a rx person that offeror no longer wishes to make offer.
- Effective when received by offeree. If by publication, effective when published. NO MAILBOX rule. Does NOT matter when recipient actually reads the communication.
4 Limitations on Offeror’s Power to Revoke
- Option K
- Merchant’s Firm Offer
- Detrimental Reliance
- Beginning performance in response to true unilateral performance
- Beginning performance - offer indifferent as to manner of acceptance
Option K
Offeree gives consideration for a promise by offeror not to revoke an outstanding offer
Note –> consideration not req’d for merchant’s firm offer
Merchant’s Firm Offer Under Article 2
- If a merchant
- Offers to buy/sell goods in a signed writing
- Writing gives assurances that it will be held open,
- Offer is NOT revocable for lack of consideration during the time stated, or if no time stated, for a rx time but cannot exceed 3 months
WATCH OUT for an offer that looks like a merchant’s firm offer but includes some consideration – this is an option K and offer can be held open for as long as parties specify.
Detrimental Reliance
When offeror could rx expect offereee would rely to their detriment on the offer, and offeree does so rely, the offer will be held irrevocable as an option K for a rx length of time
Beginning Performance in Response to True Unilateral K Offer
An offer to true unilateral K becomes Irrevocable once performance has begun. Offeror must give offeree a rx time to complete performance. Note – offeree is not bound to complete performance – they may w/d any time prior to completion of performance and there is NO acceptance until performance is complete
Note –> substantial prep to perform do not make the offer irrevocable, but may constitute detrimental reliance sufficient to make offeror’s promise binding to the extent of the detrimental reliance
Beginning Performance - Offer Indifferent As to Manner of Acceptance
Bilateral K may be formed upon start of performance by offeree. Thus, once offeree begins performance, K is complete and revocation becomes impossible. NOTE –> notification of start of performance may be necessary
Death
- Death terminates only revocable offers, NOT irrevocable K’s (option K or start of performance in unilateral K)
- Death or insanity of either party terminate offer, need not communicate to other party
- Destruction of proposed K’s subject matter
- Supervening illegality
Who may accept an offer?
- Only person to whom an offer is addressed
- Member of class to which offer has been directed
- Offeree’s power of acceptance CANNOT be assigned
- But if offeree paid consideration to keep offer open–option K–the right to accept IS TRANSFERABLE
Knowledge of Offer
Offeree must know of offer to accept it!
Acceptance of Offer for Bilateral K
Unless offer specifically provides that it may be accepted only via performance, it will be construed as an offer to enter into bilateral K and may be accepted either by:
(1) Promise to perform; or
(2) Start of performance.
Communicating Acceptance (& Silence)
Unless offer provides otherwise, must communicate acceptance to enter into bilateral K.
Silence is generally not an acceptance UNLESS:
(1) There is duty to speak when previous customs b/w parties indicate that silence acceptance is reasonable
(2) Recipient of service knows or should’ve known the service was being rendered w/ expectation of compensation and by word could have prevented the mistake , recipient may be held to have accepted the offer if they fail to speak.
Acceptance
An acceptance is a manifestation of assent to the terms of an offer. An acceptance of an offer may be made, unless otherwise provided, by any reasonable manner and any medium reasonable under circumstances.
Offers to buy goods for current or prompt shipment
Under Article 2, an offer to buy goods for current/prompt shipment = inviting acceptance either by a promise to ship or by current/prompt shipment of conforming/nonconforming goods
Acceptance must be equivocal
Tradition K law = absolute and unequivocal acceptance of each and every term of offer (mirror img rule)
CL = any different or add’l terms in acceptance make the response a rejection and counteroffer
Acceptance of Offer for Unilateral K
If an offer provides that it may be accepted only performance… special rules:
1. Complete performance req’d for acceptance, but not obligated to complete merely b/c they begun performance. Is it breach if you don’t finish performance? NO, tough luck.
2. Offeree is not req’d to give notice offeror they begun the performance but they’re req’d to notify offeror within rx time after performance has been completed. But no notice req’d if (1) offeror waived notice or (2) offeree’s performance would normally come to offeror’s attention within rx time
Shipment of Nonconforming Goods
- Shipment of nonconforming goods = acceptance creating bilateral K AND breach of K unless seller seasonably notifies buyer that a shipment of nonconforming goods is offered only as an ACCOMODATION
- Accomodation = Counter-offer
- Buyer is NOT req’d to accept accomodation goods and may reject. If rejected, shipper is NOT in breach and may reclaim accomodation goods b/c the tender does not constitue an acceptance of buyer’s original offer.
- Accomodation shipment rule applies only when shipment is used as a form of acceptance.
Watch out for pattern where party accepts an order by promising to ship, seller discovers they lack specified goods, ship nonconforming good as accomodation. THIS is a breach, not accomodation. There was a K that promised to ship. The shipment was NOT acceptance. Thus, accomodation is not possible.
Mirror Image Rule
Only applies to Common Law, is a doctrine stipulating that any acceptance of an offer is deemed to be an unconditional assent to the terms of the offer exactly as it is, without any changes or modifications.
If there are changes or modifications this is a rejection and counteroffer.
Under UCC - Additional Terms Included
The UCC Article 2 abandoned the mirror image rule providing instead that the inclusion of additional or different terms by the offeree in a definite and timely acceptance does NOT constitute a rejection and counteroffer, but rather is effective as an acceptance, UNLESS the acceptance is expressly made conditionally on assent to the additional or different terms.
Whether the additional or different terms become part of the contract depends on whether or not both parties are merchants.
Contracts Involving Nonmerchant
If any party to the contract is NOT a merchant, the additional or different terms are considered to be mere proposals to modify the contract that do NOT become part of the contract UNLESS the offeror expressly agrees.
Contracts Between Merchants
If BOTH parties to the contract are merchants, additional terms in the acceptance will be included in the contract unless:
(1) Materially alter the original terms of the offer, such as by changing a party’s risk or the remedies available;
(2) Offer expressly limits acceptance to the terms of the offer; OR
(3) The offer has already objected to the particular terms, or objects within a reasonable time after notice of them is received.
Knockout Rule
Conflicting terms in the offer and acceptance are knocked out of the contract, because each party is assumed to object to the inclusion of such terms in the contract.
Under this rule, gaps left by knocked out terms are filled by the UCC.
Merchant’s Confirmatory Memo
A merchant’s memo confirming an oral agreement that contains different or additional terms is also subject to the battle of the forms provision.
Depending on the jx, different terms are treated either the same as additional terms or knocked out.
Mutual Assent
Mutual assent is described as an agreement on the “same bargain at the same time” or “a meeting of the minds”. Mutual assent typically requires an offer and acceptance.
Mutual Assent is Uncertain
In situations in which it cannot be determined w/ certainty which specific communication was the offer and which the acceptance but the parties act as though there is a contract, the UCC considers this a binding contract even though the moment of its making is uncertain.
Mailbox Rule
Acceptance by mail or similar means is effective at the moment of dispatch, provided that the mail is:
(1) Properly addressed; and
(2) Stamped.
Mailbox Rule Exceptions
(1) The offer stipulates that acceptance is not effective until received;
(2) Option contract is involved (an acceptance under an option contract is effective only upon receipt);
(3) Offeree sends a rejection and then sends an acceptance, in which case whichever arrives first is effective;
(4) Offeree sends an acceptance and then a rejection, in which case the acceptance is effective, unless the rejection arrives first and the offeror detrimentally relies on it.
Acceptance by Unauthorized Means
An acceptance transmitted by unauthorized means or improperly transmitted by authorized means may still be effective if it is actually received by the offeror while the offer is still in existence.
Bilateral Contracts Formed by Performance
If a contract is not formed by the parties’ communications, but they begin to perform as if they formed a contract, a contract is formed.
Auction Contracts
The UCC contains some special rules regulating auction sales. A sale by auction is complete when the auctioneer so announces by the fall of the hammer or in another customary manner.
An auction sale is w/ reserve unless the goods are explicitly put up without reserve.
With reserve - means the auctioneer may withdraw the goods at ANY TIME until he announces completion of the sale.
Consideration
Courts will enforce a promise as a contract ONLY IF it is supported by consideration or a substitute for consideration.
For consideration there must be:
(1) A bargained-for exchange between the parties; and
(2) Legal value
(meaning that which is bargained for must be considered of legal value or, as it traditionally stated it must constitute a benefit to the promisor or a detriment to the promisee).
Bargained-For Exchange
Requires that the promise induce the detriment and the detriment induce the promise.
Note: There is no bargain involved when one party gives a gift to another.
Act or Forbearance by Promisee Must be of Benefit to Promisor
An act or forbearance by the promisee is sufficient consideration to form a contract if it benefits the promisor. The benefit, however, need not be economic.
i.e. Gratification of influencing the mind of another is sufficient.
Past or Moral Consideration
A promise given in exchange for something already done does not satisfy the bargain requirement.
Exception: Where a past obligation is unenforceable because of technical defense, that obligation will be enforceable if a new promise is made in: (1) writing or (2) partially performed.
Also note: If a past act benefited the promisor and was performed by the promisee at the promisor’s request or in response to an emergency, a subsequent promise to pay for that act will be enforceable.
Adequacy of Consideration
Generally, the Courts do not inquire into the adequacy or fairness of consideration. However, if something is entirely devoid of value, it is insufficient.
i.e. Paying $300 for a CD that is actually worth $20. As long as there is a bargain, Courts do not look at whether it was worth the amount.
Legal Detriment
Legal detriment results if the promisee does something they are not legally obligated to do or refrains from doing something they have a legal right to do.
Legal Benefit
Legal benefit is a forbearance or performance of an act that the promisor was not legally entitled to demand or expect.
Preexisting Legal Duty
Performing or promising to perform an existing legal duty is insufficient consideration.
HOWEVER, there is consideration to preexisting legal duty if:
(1) New or different consideration is promised;
(2) Promise is to ratify a voidable obligation;
(3) Preexisting duty is owed to a third person rather than to the promisor;
(4) There is an honest dispute as to the duty; OR
(5) There are unforeseen circumstances sufficient to discharge a party (modern view: the modification is fair and equitable in view of circumstances not anticipated when the contract was made).
Modification of Contracts
Under general contract law, a contract cannot be modified unless the modification is supported by NEW consideration. The modern view (apply for MBE), however, permits modification without consideration if:
(1) Modification is due to circumstances that were unanticipated by the parties when the contract was made; and
(2) It’s fair and equitable.
NOTE: Under the UCC, consideration is not necessary to modify; all the parties need are good faith promises of new and different terms.
Good Faith Agreement Modification for UCC
A good faith agreement modifying a contract subject to the UCC needs NO consideration to be binding.
Discharge of Debts
A debt can be discharged through an accord and satisfaction. An accord must be supported by consideration.
Even if the consideration is of lesser value than the originally bargained-for consideration in the prior contract, it’s sufficient if the new consideration is of a DIFFERENT type or if the claim is to be paid to a third party.
Note: Payment of a smaller sum than due on the existing debt is generally not sufficient consideration. However, payment earlier than required or payment in different form i.e. stock/cash is a change in performance and could make the payment of a smaller amount sufficient consideration.
Forbearance to Sue
A promise to refrain from suing on a claim constitutes consideration if the claim is valid or the claimant in good faith believed the claim was valid.
Mutual and Illusory Promises
Consideration must exist on both sides of a contract. If only one party is bound to perform, the promise is illusory and will not be enforced.
Courts often supply implied promises to infer mutuality.
Examples of contracts that satisfy mutuality requirement:
(1) Requirements and output contracts;
(2) Conditional promises (unless the contract is entirely within the promisor’s control);
(3) Contracts where a party has the right to cancel, if that right is somehow restricted;
(4) Exclusivity agreements;
(5) Voidable promises;
(6) Unilateral and option contracts; and
(7) Gratuitous suretyship promises made before or at the same time that consideration flows to the principal debtor.
Promise will NOT be found illusory if:
(1) At least one alternative involves legal detriment and the power to choose rests w/ the promisee or a third party; or
(2) Valuable alternative (involving a legal detriment) is actually selected.
Promissory Estoppel
(1) Promise made;
(2) Reasonably foreseeable there will be detrimental reliance; and
(2) Justice requires enforcement.
Consideration is NOT necessary if the facts indicate that the promisor should be estopped from not performing. A promise is enforceable if necessary to prevent injustice if:
(1) Promisor should reasonably expect to induce action or forbearance; and
(2) Such action or forbearance is in fact induced.
Note: Only apply promissory estoppel when there’s no consideration. Go through consideration analysis first.
Defenses Based on Lack of Capacity
(1) Contracts of Infants (Minors);
(2) Mental Incapacity;
(3) Intoxicated Persons
Contracts of Infants (Minors)
Infants (in most jx, anyone under the age of 18) generally lack capacity to enter into a contract binding on themselves. But, contractual promises of an adult made to an infant are binding on the adult.
An infant may choose to disaffirm a contract any time before (or shortly after) reaching the age of majority. The contract must be disaffirmed as a whole; it can’t be affirmed in part and disaffirmed in part. If an infant chooses to disaffirm, they must return anything that they received under the contract that still remains at the time of disaffirmance.
Note: There is no obligation to return any part of the consideration that has been squandered, wasted, or negligently destroyed.
Implied Affirmation
Retaining benefits after gaining capacity. A minor affirms either expressly or by conduct, such as by failing to disaffirm the contract w/ a reasonable time after reaching majority.
Necessaries
Items necessary for subsistence, health, or education (including food, shelter, clothing, and medical care). A minor may disaffirm a contract for necessaries but will be liable in restitution for the value of benefits received.
Exceptions to Legal Incapacity to Contract
States have created statutory exceptions for student loans, insurance contracts, and agreements not to reveal an employer’s proprietary information.
Mental Incapacity
One whose mental capacity is so deficient that they are incapable of understanding the nature and significance of a contract may disaffirm when lucid or by a later appointed legal representative.
They may likewise affirm during a lucid interval or upon complete recovery, even without formal restoration by judicial action.
Generally, the contract is voidable. They are only liable in quasi-contract for necessaries.
Note: Mentally incompetent person has no ability to contract once a guardian has been appointed, so any attempted contracts by an incapacitated person who is under guardianship are void.
Intoxicated Persons
One who is intoxicated that they don’t understand the nature and significance of their promise may be held to have made only a voidable promise IF the other party had reason to know of the intoxication.
The intoxicated person may affirm the contract upon recovery.
There may be quasi-contractual recovery for necessaries furnished during the period of incapacity.
Duress and Undue Influence
Contracts induced by duress or undue influence are voidable and may be rescinded as long as they are not affirmed.
Misunderstanding - Ambiguous Contract Defense
If the contract includes a term w/ at least two possible meanings, the result depends on the parties’ awareness of the ambiguity:
(1) Neither party aware - No contract, unless both parties intended the same meaning;
(2) Both parties aware - No contract unless both parties intended the same meaning; or
(3) One party aware - Binding contract based on what the ignorant party reasonably believed to be the meaning of the ambiguous words.
Ambiguity is one area where subjective intent is taken into account.
Mutual Mistake on Existing Facts Defense
If both parties entering into a contract are mistaken about existing facts (not future happenings) relating to the agreement, the contract may be voidable by the adversely affected party if the mistake concerns:
(1) Basic assumption on which the contract is made;
(2) Material effect on the agreed-upon exchange; AND
(3) Party seeking avoidance did not assume the risk of the mistake.
If Party Bore the Risk
Mutual mistake is not a defense if the party asserting mistake as a defense bore the risk that the assumption was mistaken. This commonly occurs when one party is in a position to better know the risks than the other party or where the parties knew that their assumption was doubtful.
If there’s a Mistake in Value
Still an enforceable contract. If the parties to a contract make assumption as to the value of the subject matter, mistakes in those assumption will generally not be remedied - even though the value of the subject matter is generally a basic assumption and the mistake creates a material imbalance - because both parties usually assume the risk that their assumption as to value is wrong.
Unilateral Mistake Defense
If only one of the parties is mistaken about facts relating to the agreement, the mistake will not prevent formation of a contract.
But, if the non-mistaken party knew or had reason to know of the mistake made by the other party, the contract is voidable by the mistaken party. As w/ mutual mistake, the mistake must have a material effect on the agreed-upon exchange, and the mistaken party must not have borne the risk of the mistake.
Mistake by the Intermediary (Transmission)
When there is a mistake in the transmission of an offer or acceptance by an intermediary, the prevailing view is that the message as transmitted is operative unless the other party knew or should have known of the mistake.
Fraudulent Misrepresentation (Fraud in the Inducement)
If a party induces another to enter into a contract by using fraudulent misrepresentation, the contract is voidable by the innocent party if they justifiably relied on the fraudulent misrepresentation. This is fraud in the inducement.
Material Misrepresentation
Whether or not a misrepresentation is fraudulent, the contract is voidable by the innocent party if the innocent party justifiably relied on the misrepresentation and the misrepresentation was material.
Misrepresentation is material if:
(1) It would induce a reasonable person to agree; or
(2) Maker knows that for some special reason it is likely to induce the particular person to agree, even if a reasonable person would not.
Note: Misrepresentation can be inferred from conduct.
Justified Reliance
A party is not entitled to relief if the reliance was unreasonable under the circumstances.
Note: Failure to read a contract or use care in reading it does not necessarily preclude a party from avoiding a contract for misrepresentation.
Innocent Party May Rescind
Innocent party does not have to wait until they’re sued on the contract but may take affirmative action in equity to rescind the agreement.
Public Policy Defenses
If the consideration or subject matter of the contract is illegal, the contract is void.
Exceptions:
(1) Plaintiff is unaware of the illegality while the Defendant knows of the illegality;
(2) Parties are not in pari delicate (one party is not as culpable as the other); or
(3) Illegality is the failure to obtain a license when the license is for revenue-raising purposes rather than for protection of the public.
If only the purpose of the contract is illegal, the contract is voidable by a party who was:
(1) Unaware of the purpose; or
(2) Aware but did not facilitate the purpose and the purpose does not involve serious moral turpitude.
Unconscionability
Allows court to modify or reduce to enforce an entire contract or a provision in it to avoid “unfair” terms, usually due to some unfairness in the bargaining process. Determined at the time the contract was formed.
Note: Unfair price alone is not a ground for unconscionability.
(1) Unfair surprise;
(2) Oppressive terms;
(3) Tested when contract formed.
Common Instances of Procedural Unconscionability (4)
(1) Inconspicuous Risk-Shifting Provisions;
(2) Contracts of Adhesion;
(3) Exculpatory Clauses;
(4) Limitations on Remedies.
Inconspicuous Risk-Shifting Provisions
Standardized printed form contracts often contain a material provision that seeks to shift a risk normally borne by one party to the other. Courts have invalidated these provisions because they’re inconspicuous or incomprehensible to the average person, even if brought to their attention.
Contract of Adhesion
Contract of adhesion is a contract where the parties are of such disproportionate bargaining power that the party of weaker bargaining power could not have negotiated for variations in the terms of the contract.
These contracts are prepared by the party with greater bargaining power for use in all similar business transactions and given to customers on a take-it-or-leave it basis.
Exculpatory Clauses
Releasing a contracting party from liability for their own intentional wrongful acts is usually found to be unconscionable because such a clause is against public policy.
Limitations on Remedies
Contractual clauses limiting liability for damages to property generally will not be found unconscionable UNLESS it is inconspicuous.
But, a contract that limits a party to a certain remedy and that remedy fails of its essential purpose, the limitation may be found unconscionable and courts will ignore it.
Effect if Court Finds Unconscionable Clause
Courts may:
(1) Refuse to enforce the contract;
(2) Enforce the remainder of the contract without the unconscionable clause; or
(3) Limit the application of any clause so as to avoid an unconscionable result.
Unconscionability Defense Should Apply When:
Great differences in bargaining power (i.e. big company vs. average consumer). Note: A contract turning out badly for one party is insufficient in itself to give rise to unconscionability.
Statute of Frauds Defense
In most instances, an oral contract is enforceable unless their subject matter falls under the SOF. Then, it must be evidenced by a writing signed by the party to b bound.
Statute of Frauds Categories: MY LEGS!!!
(1) Marriage
(2) Year
(3) Land sales
(4) Executors
(5) Goods for $500+
(6) Sureties
Marriage SOF
A promise made in consideration for marriage must be evidenced by a writing. This applies to promises that induce marriage by offering something of value.
Year SOF
Contracts impossible to complete within 1 year is subject to SOF. Part performance does not satisfy the SOF in this case. The date runs from the date of the agreement (formation) and NOT from the date of performance.
Note: Even if the contract CANNOT be performed within a year, full performance by one party will remove it from the Statute.
Also, if there is no date in the contract, if in theory the job can get done in less than a year, it does not fall within SOF (Superman standards).
Overall: If the actions are not completed within a year, but in theory they could have gotten the task done within less than a year, it will NOT be subject to SOF.
No SOF requirements for Lifetime Deals
Watch out for a contract measured by a lifetime - i.e. A promise to “work until I die” is not within the SOF, why?
Because it is capable of performance within a year - a person can die at any time.
BUT: Contract for an 1+ year is subject to SOF. Must be in writing and signed by the party to be bounded.
Lifetime contract? Not subject to SOF.
Land Sales SOF
A promise creating an interest in land must be evidenced by a writing. This includes not only agreements for the sale of real property, but also:
(1) Leases for more than one year;
(2) Easements of more than one year;
(3) Mortgages and most other security liens;
(4) Fixtures;
(5) Minerals (or the like) or structures if they are to be severed by the buyer.
Items that do NOT create an interest in land:
(1) Contracts to build a building or to find a buyer for a seller (I.e. a broker’s contract) do not create an interest in land;
(2) Full performance by the seller (conveyance of the property to the purchaser) will take the contract out of the SOF. Part performance by the buyer may also remove the contract from the statute.
Note: Construction contracts are not necessarily subject to SOF if it can be finished within a year.
Equal Dignity Rule
The authorization to enter into a contract on behalf of someone else, (i.e. an agent) must be in writing only if the underlying deal would be subject to SOF.
Oral authorization is OK if the underlying deal is not subject to SOF.
Executors SOF
A promise by an executor or administrator to pay the estate’s debts out of their own funds must be evidenced by writing.
Goods for $500+ SOF
A contract for the sale of goods for a price of $500 or more is within the SOF and generally must be evidenced by a signed writing to be enforceable.
Under the UCC, partial performance takes the contract out of the Statute of Frauds if the goods have been either received and accepted or paid for.
Sureties SOF
A promise to answer for the debt or default of another must be evidenced by writing. The promise may arise as a result of a tort or contract, but it must be collateral to another person’s promise to pay, and not a primary promise to pay.
Must see language “if X doesn’t pay, I will pay”
However, if the main purpose or leading object of the promisor is to serve a pecuniary interest of his own, the contract is not within SOF even though the effect is still to pay the debt of another.
(i.e. homeowner promises to pay contractor’s debt to building supplier if contractor does not pay, so contractor can obtain supplies to work on homeowner’s house)
Noncompliance w/ the SOF
Noncompliance w/ the SOF renders the contract unenforceable at the option of the party to be charged. So, the party being sued may raise the lack of a sufficient writing as an affirmative defense.
If the SOF is not raised as a defense, it is waived.
Contract Modification
A written contract can be modified orally, but the modification must be in writing if the contract as modified falls within the SOF.
i.e. A sale of goods contract, if the contract as modified is for $500 or more, it must be evidenced by a writing; if the contract as modified is for less than $500, no writing is necessary.
Clauses Prohibiting Oral Modification
Unenforceable in Common Law contracts;
Enforceable in Article 2 UCC contracts.
Under Common Law, if a contract explicitly provides that it may be modified only by a writing, the parties can orally modify the contract. (Not effective)
Under the UCC, if a contract explicitly provides that it may be modified or rescinded except by a signed wiring, that provision is given effect. If the contract is between a merchant and a non merchant, however, this provision requires the non merchant’s separate signature. (Clause effective)
Waiver - Orally Modifying a Contract
Parties attempting to orally modify a contract that requires written modification is technically ineffective as a modification but can operate as a waiver.
A waiver will be found whenever the other party has changed position in reliance on the oral modification. However, a party who makes a waiver affecting an executory (not yet performed) portion of the contract may retract the waiver if they notify the other party that strict performance of the waived terms is required.
Waiver may not be retracted if the other party detrimentally relied on it.
Doctrine of Part Performance - Land Sales Exceptions for SOF
(1) Leases of 1 year or less it can be oral;
(2) Part performance of real estate contracts -
(Need at least (2) of the following)
*Payments;
*Possession;
*Valuable Improvements.
If it falls under the above excepts, contract does not fall under SOF.
Exception for Service Contracts
Full performance contract satisfies SOF. But, part performance does not satisfy SOF.
i.e. Sesame Street orally agrees to employ Big Bird for 2 yrs for $50,000. Big Bird works for 2 years, but Sesame Street refuses to pay. Does Big Bird need a writing to satisfy SOF?
- No because there was full performance.
However, if Sesame Street fires Big Bird after only 3 months?
- Yes, Sesame Street can raise a SOF defense. So, apply the SOF analysis then go to restitution to provide remedy for the Plaintiff who has not been justly compensated for working 3 months. Provide Big Bird restitution - Reasonable FMV of the benefit conferred by Sesame Street.
Exception for Sale of Goods Contracts
Part performance takes a sale of goods contract out of the SOF when:
(1) Goods have been accepted;
(2) Goods paid for; or
(3) Substantial beginning of specially manufactured goods (made to order, seller cannot resell them).
If a sales contract is only partially paid for or accepted, the contract is enforceable only to the extent of the partial payment or acceptance.
If goods are either received and accepted or paid for, the contract is enforceable without writing.
However, contract is not enforceable beyond the quantity of goods accepted or paid for. Thus, if only some of the goods called for in the oral contract are accepted or paid for, the contract is only partially enforceable.
If an indivisible item (i.e. a boat) is partially paid for, most courts hold that SOF is satisfied for the whole item.
Judicial Admissions Exception
Agreement admitted under oath enforceable without writing.
If the party against whom enforcement is sought admits in pleadings, testimony, or otherwise in Court that the contract for sale was made, the contract is enforceable without a writing (but in such a case the contract is not enforced beyond the quantity of goods admitted). Treated the same as though the party signed the writing.
Merchant Confirmatory Memorandum Rule
(1) Both parties are merchants;
(2) Agree to contract;
(3) One party sends signed writing containing quantity terms; and
(4) No objection by recipient within 10 days.
If two merchants agree over the phone and one sends a written confirmation to the other, Article 2 allows one merchant to use its own confirmation to satisfy the SOF against another merchant.
Equitable and Promissory Estoppel against SOF
Estoppel may be applied if it would be inequitable to allow the SOF to defeat a meritorious claim.
i.e. Situations where the Defendant falsely and intentionally tells the Plaintiff that the contract is not within the SOF or induces the Plaintiff to change position in reliance on an oral agreement.
Writing Requirement for SOF
SOF requires only one or more writings that:
(1) Reasonably identify the subject matter of the contract;
(2) Indicate that a contract has been made between the parties; and
(3) State w/ reasonable certainty the essential terms.
Writing can be a receipt, letter, a check w/ details in the memo line, or a written offer that was accepted orally.
Electronic Record Satisfies Writing Requirement
If a law requires a record to be in writing, an electronic record (I.e. an email) satisfies the law.
Common Law Writing Requirements for SOF
(1) All material terms (Who is the contract between and what is this contract about?);
(2) Defendant’s signature.
Writing for Land Sale Contracts
Must contain description of the land and the price.
Writing for Employment Contracts
Must state the length of the employment.
Writing for Sale of Goods Contracts
Must indicate that a contract has been made; specify the quantity term; and Defendant’s signature.
