contracts/sales: is the deal a contract?

Question 1

For a “deal” to be enforceable, there must be

Answer 1

A. Consideration

B. No Valid Defenses

Question 2

Consideration: definition

Answer 2

“Consideration” is a “bargained-for exchange of legal detriments,” which has two-parts:

a bargained-for exchange; the promisor bargained for an exchange by the promisee in which

the promisee (1) promises to do something (or in fact does something) that, but for the contract, he or she is not obligated to do or

(2) promises not to do something (or in fact does not do something) that, but for the contract, he or she is legally entitled to do (i.e., legal detriment).

Question 3

Consideration: sufficiency

Answer 3

Consideration must be legally “sufficient” for there to be a binding contract. To be sufficient, the consideration must be something that has value in the eyes of the law.

Question 4

Consideration: adequacy

Answer 4

If the requirement of sufficiency of consideration is met, there is no additional requirement of equivalence in the values exchanged, unless the contract is so one-sided that it is unconscionable.

As long as consideration exists, the parties’ motives for performance are irrelevant

Question 5

What does NOT constitute consideration: Past consideration (or moral obligation)

Answer 5

If the promisee has already performed the act before the promisor makes her promise, there is no “bargained-for” exchange and thus no consideration.

(there are a few exceptions to this rule)

Question 6

What does NOT constitute consideration: Pre-existing legal duty

Answer 6

If the promisee is legally bound to do (or not to do) the act either by a prior contract or statutory law, there is no legal detriment suffered by the promisee. This means that the modification of an existing contract requires new consideration.

If a modification is induced by improper threats, the innocent party may also raise the defense of economic duress if it had no reasonable alternatives.

(there are exceptions to this rule)

Question 7

What does NOT constitute consideration: part payment of a debt

Answer 7

If a creditor agrees to take less than full payment in exchange for a release, may the creditor seek the remainder from the debtor?

If the debt is due (or overdue) and undisputed in amount, part payment does not constitute consideration for the release and thus the debtor owes the remainder.

But if the debt is not yet due (and the debtor agrees to pay early) or if there is a good faith dispute as to the amount of the debt, part payment would constitute consideration for a release (these are examples of an “accord and satisfaction”)

There would also be consideration if a different type of performance—transfer of goods or services—is agreed upon (this is also an example of an “accord and satisfaction”).

Question 8

What does NOT constitute consideration: extra time to pay a debt

Answer 8

A creditor’s promise to allow the debtor extra time to pay a debt is not binding, unless the debtor gives new consideration.

Question 9

What does NOT constitute consideration: promise not to sue (a settemet)

Answer 9

A promise not to sue constitutes consideration if the promisor has either a good faith (subjective) or reasonable (objective) belief that the suit is valid.

If a party executes a written instrument (i.e., a quitclaim deed) settling a claim that was bargained for by the other party, the instrument is sufficient consideration even if the executing party did not subjectively believe the claim was valid.

Question 10

Promissory Estopple

Answer 10

If there is no consideration, may the promisee enforce the deal? Generally, no.

But consider promissory estoppel, which applies where the promisor (1) made a promise; (2) the promisee reasonably, detrimentally, and foreseeably relied on the promise (i.e., the promise induced the promisee to act); and (3) enforcement of the promise is necessary to avoid injustice.

Promissory estoppel damages are generally limited to reliance damages (as opposed to expectation damages).

The Statute of Frauds (“SOF”) does not apply to promissory estoppel.

Question 11

No valid defenses (defenses)

Answer 11

A contract is not enforceable if there is a valid defense, such as:

1. Lack of Capacity
2. Statute of Frauds
3. Illegality
4. Duress/Undue Influence
5. Misrepresentation
6. Mistake or Misunderstanding
7. Unconscionability

Question 12

No valid defenses (defenses): Lack of capacity

Answer 12

The following parties lack capacity to enter into a contract:

1) minors (under age 18)
2) mental incompetents (unable to understand legal significance of acts)

The contracts of a party who has been adjudicated incompetent are void

3) intoxicated persons (unable to understand legal significance of acts and the other party knew or should have known of the intoxication)

A party lacking capacity may disaffirm a contract (i.e., the contract is voidable by the incapacitated party) during disability or within a reasonable time thereafter

Incapacitated parties are liable on contracts in two situations:

(1) If the incapacitated party retains the benefit of the contract after gaining capacity (e.g., reaching age 18) or fails to disaffirm the contract within a reasonable time after gaining capacity, he has impliedly “affirmed” the contract and it is enforceable

An affirmation by a minor or incompetent does not require new consideration

(2) The contract is for necessaries (a/k/a necessities); if so, the incapacitated party is liable in quasi-contract for the value of the goods or services, but not for the actual contract price

Question 13

No valid defenses (defenses): statute of frauds flow chart

Answer 13

SOF Flowchart:

a. Is the contract subject to the SOF?
b. If so, has the SOF been satisfied?
c. If the SOF applies and has not been satisfied, are there any remedies available to the plaintiff

Question 14

No valid defenses (defenses): statute of frauds: a. Is the contract subject to the SOF?

Answer 14

General Rule: Oral contracts are generally enforceable (for goods $400 or less)

Exceptions: The following contracts are subject to the Statute of Frauds (must be signe & in writing):

1) Agreements to marry supported by some form of financial consideration (e.g., prenuptial agreements)
2) Promise by an executor (or administrator) of an estate to pay the estate’s debts out of the executor’s own pocket.
3) Suretyship contracts (i.e., where one person “guarantees” the payments of another; e.g., a co-signer)

 Exception:  if the "main or primary purpose" of the agreement is to benefit the "surety," the contract does not have to be in writing

4) Service contracts that by their own terms are NOT CAPABLE of being performed within one year from the date of the contract.
5) A contract for the sale of goods when the purchase price is $500 or more (as ultimately modified).
6) A contract to convey an interest in land, except short-term (12 months or fewer) leases

Question 15

No valid defenses (defenses): statute of frauds: b. If so, has the SOF been satisfied?

Answer 15

1) a writing signed by the defendant

the SOF does not require the parties to sign a written contract; instead, any writing that contains the essential terms and is signed by the defendant will suffice

for non-goods contracts: all material terms must be in writing

for goods contracts ($500 or more), the only essential term is quantity

UCC- writing must be signed by the defendant or a written confirmation may be used between two merchants if the other party does not object to the written confirmation within 10 days of receipt; the contract is not enforceable beyond the quantity stated in the confirmation

the signature requirement may be satisfied by an electronic signature, such as a person typing her name at the end of an email message.

2) Performance

Question 16

No valid defenses (defenses): illegality

Answer 16

Illegality:
If the subject matter of a contract is illegal (e.g., a contract with a hit man or a gambling contract in a state where gambling is illegal), neither party may enforce it at any time. In other words, the court will leave the parties as it finds them.

If the contract merely relates to an illegal act (e.g., the purchase of a gun on credit from Walmart that is to be used in a murder), it is enforceable by the party who is not involved in the illegal act (i.e., Walmart).

If one party to an illegal contract is a member of a class for whose protection the statute or regulation was enacted, the protected person may enforce (or disaffirm) the contract.

License:
If a contract is illegal solely because a party does not have a required license, the enforceability of the contract depends on the purpose of the license:

If the purpose of the license is to regulate the skill and quality of a particular occupation (e.g., a license to practice law, medicine, plumbing, nursing), the contract is unenforceable.

If the purpose of the license is solely to raise revenue (e.g., a business license), the contract is enforceable.

Question 17

No valid defenses (defenses): duress/ undue influence

Answer 17

There are three types of duress under contract law:

(1) Force or Threats of Imminent Violence or Unlawful Imprisonment: If a party is physically forced to sign a contract or signs a contract due to threats of immediate violence or unlawful imprisonment, the contract is void.
(2) Other Improper Threats. If a party enters into a contract because of improper threats, the contract is voidable.
(3) Economic Duress: As a general rule, a contract is enforceable despite the fact that one party took advantage of another party’s economic distress. However, if one party threatens to commit a wrongful act (e.g., breach a valid contract) that would seriously endanger the other party’s finances and the other party has no adequate means to prevent such loss, the contract is voidable by the innocent party.

Undue Influence:

Undue influence is unfair persuasion of a party who is under the domination of the person exercising the persuasion and who by virtue of the relationship between them (i.e., a confidential or fiduciary relationship) is justified in assuming that the person will not act in a manner inconsistent with her welfare

Question 18

No valid defenses (defenses): misrepresentation

Answer 18

Fraud in the Inducement:
This defense exists if a party is induced to enter into a contract by false assertions of fact. Under contract law, a misrepresentation makes a contract voidable if it is either fraudulent or material.

Misrepresentations may consist of outright lies, innocent misstatements (if material), half-truths, concealment or, under the right circumstances, silence.

The mere fact that the truth of a misrepresentation could have been revealed by the exercise of due care does not mean the innocent party’s reliance was unjustified.

Traditionally, the defense of misrepresentation required false assertions of past or present facts. However, the Restatement and a majority of jurisdictions also recognize “promissory fraud.”

A claim for promissory fraud is based on a promise of future action; such claim is actionable if the promise was made with an intent not to perform the future action.

Fraud in the Execution (Factum):

If the defrauding party misrepresents the very nature of the document presented to the innocent party for signature, the agreement is void.

Question 19

No valid defenses (defenses): mistake

Answer 19

Two types of Mistakes:

1) Mutual Mistake:

both parties are mistaken about a basic material fact

if the mistake relates to what is being purchased (i.e., the subject matter of the contract—a real Picasso as opposed to a fake Picasso), the contract is unenforceable

this defense is unavailable if the party asserting it “assumed the risk” of the mistake; a party assumes the risk of mistake where:

(1) the parties knew their assumption was doubtful, or
(2) one party (e.g., contractor) is in a better position to know the risks than the other party (e.g., homeowner)

by contrast, if the mistake relates to the “value” of what is being purchased (the value of a real Picasso), the contract is fully enforceable (as long as there was no fraud, etc.)

2) Unilateral Mistake:
Only one party was mistaken

General Rule: Contract is enforceable

Exception 1: In cases involving a mechanical error of computation, the non-mistaken party may not “snap up” an offer or bid that it knew or should have known was erroneous (i.e., the offer was too good to be true)

Exception 2: Under the Restatement, unilateral mistake is also a valid defense if enforcement of the contract would be unconscionable.

Question 20

No valid defenses (defenses): unconscionability

Answer 20

UCC and common law doctrine

Tested at the time of contracting.

Question of law for the court.

An unconscionable contract is one that is

(i) procedurally unfair (e.g., surprise terms, adhesion contracts); and
(ii) the terms are oppressive (e.g., grossly overpriced)

Question 21

No valid defenses (defenses): misunderstanding

Answer 21

There is no manifestation of mutual assent (and thus no contract) if the parties attach materially different meanings to their manifestations and neither party knows or has reason to know the meaning attached by the other. (peerless ex)

By contrast, if one party knows (or has reason to know) that the two parties attach materially different meanings to a term, and the other party does not know or have reason to know this, there is an enforceable contract and the meaning given by the latter party (the “innocent” party) controls.

Question 22

Examples of insufficient consideration

Answer 22

1. Love and affection
2. Performing a service the law believes does not exist (e.g., Voodoo curse)
3. Nominal or token consideration (except for option contracts)
4. A promise to forbear filing a law suit the plaintiff knows is frivolous