final

Question 1

The four requirements for forming a valid contract

Answer 1

• Agreement
  A mutual understanding or meeting of the minds between two or more individuals regarding the terms of a contract.
• Consideration
  The value given in return for a promise or performance in a contractual agreement.
• Capacity
  Contractual capacity
  The capacity required by the law for a party who enters into a contract to be bound by that contract.
• Legality
  Legality is the fourth requirement for a valid contract to exist. For a contract to be valid and enforceable, it must be formed for a legal purpose

Question 2

Bilateral Contract

Answer 2

A type of contract that arises when a promise is given in exchange for a return promise.

Question 3

Unilateral Contract

Answer 3

A type of contract that results when an offer can be accepted only by the offeree’s performance.

Question 4

Formal Contract

Answer 4

An agreement that by law requires a specific form for its validity.

Question 5

Informal Contract

Answer 5

A contract that does not require a specific form or method of creation to be valid.

Question 6

Void

Answer 6

A contract having no legal force or binding effect.

Question 7

Voidable contract

Answer 7

A contract that may be legally avoided at the option of one or both of the parties.

Question 8

Unenforceable Contract

Answer 8

A valid contract rendered unenforceable by some statute or law.

Question 9

Extrinsic Evidence

Answer 9

Any evidence not contained in the contract itself, which may include the testimony of the parties, additional agreements or communications, or other information relevant to determining the parties’ intent.

Question 10

Interpretation of Contracts

Answer 10

Increasingly, plain language laws require contracts to be written in nontechnical language so that the terms are clear and understandable to the parties. Under the plain meaning rule, a court will enforce the contract according to its obvious terms, the meaning of which must be determined from the written document alone. Other rules applied by the courts when interpreting contracts include giving greater consideration to specific wording and holding a party that uses vague terms responsible for the ambiguities.

Question 11

Requirements of an offer

Answer 11

intent, reasonably certain terms, & communication

Question 12

Intent

Answer 12

Intent is not determined by the subjective intentions, beliefs, or assumptions of the offeror. Rather, it is determined by what a reasonable person in the offeree’s position would conclude that the offeror’s words and actions meant. Offers made in obvious anger, jest, or undue excitement do not meet the requirement of serious, objective intent. Because these offers are not effective, an offeree’s acceptance does not create an agreement.

Question 13

(Definiteness of the Offer) reasonably certain terms

Answer 13

An offer must have reasonably definite terms so that a court can determine if a breach has occurred and give an appropriate remedy.

The specific terms required depend, of course, on the type of contract. Generally, a contract must include the following terms, either expressed in the contract or capable of being reasonably inferred from it:

1. The identification of the parties.
2. The identification of the object or subject matter of the contract (also the quantity, when appropriate), including the work to be performed, with specific identification of such items as goods, services, and land.
3. The consideration to be paid.
4. The time of payment, delivery, or performance.

An offer may invite an acceptance to be worded in such specific terms that the contract is made definite.

Question 14

communication

Answer 14

the offer must be communicated to the offeree. Ordinarily, one cannot agree to a bargain without knowing that it exists.

Question 15

requirements of an offer

Answer 15

Three elements are necessary for an offer to be effective:

1. There must be a serious, objective intention by the offeror.
2. The terms of the offer must be reasonably certain, or definite, so that the parties and the court can ascertain the terms of the contract.
3. The offer must be communicated to the offeree.

Question 16

What constitutes a valid offer & what doesn’t

Answer 16

opinion, future intent, preliminary negotiations & advertisements

Question 17

Expressions of opinion.

Answer 17

An expression of opinion is not an offer. It does not indicate an intention to enter into a binding agreement.

Question 18

Statements of future intent.

Answer 18

A statement of an intention to do something in the future (such as “I plan to sell my Verizon stock”) is not an offer.

Question 19

Preliminary negotiations.

Answer 19

A request or invitation to negotiate is not an offer. It only expresses a willingness to discuss the possibility of entering into a contract. Statements such as “Will you sell your farm?” or “I wouldn’t sell my car for less than $8,000” are examples.

Question 20

Advertisements and price lists.

Answer 20

In general, representations made in advertisements and price lists are treated not as offers to contract but as invitations to negotiate.Footnote Only rarely are such materials construed as offers. On some occasions, courts have considered advertisements to be offers because they contained definite terms that invited acceptance. (An example is an ad offering a reward for a lost dog.)

Question 21

Termination of offers

Answer 21

revocation, counteroffers, lapse of time, death of a party, destruction of the subject matter or illegality

Question 22

Revocation

Answer 22

The withdrawal of a contract offer by the offeror. Unless an offer is irrevocable, it can be revoked at any time prior to acceptance without liability.

Revocation may be accomplished by either of the following:

1. Express repudiation of the offer (such as “I withdraw my previous offer of October 17”).
2. Performance of acts that are inconsistent with the existence of the offer and are made known to the offeree (for instance, selling the offered property to another person in the offeree’s presenc

Question 23

counteroffer

Answer 23

An offeree’s response to an offer in which the offeree rejects the original offer and at the same time makes a new offer.

Question 24

Lapse of Time

Answer 24

An offer terminates automatically by law when the period of time specified in the offer has passed.
If the offer states that it will be left open until a particular date, then the offer will terminate at midnight on that day.
If the offer states that it will be left open for a number of days, this time period normally begins to run when the offer is actually received by the offeree, not when it is formed or sent.

Question 25

destruction of the subject matter or illegality

Answer 25

An offer is automatically terminated if the specific subject matter of the offer (such as a smartphone or a house) is destroyed before the offer is accepted.

Question 26

death of a party

Answer 26

An offeree’s power of acceptance is also terminated when the offeror or offeree dies or becomes legally incapacitated, unless the offer is irrevocable.

Question 27

Acceptance

Answer 27

The act of voluntarily agreeing, through words or conduct, to the terms of an offer, thereby creating a contract.

Question 28

e-contract

Answer 28

A contract that is formed electronically.

Question 29

Consideration

Answer 29

The value given in return for a promise or performance in a contractual agreement.

Question 30

Consideration elements –
legally sufficient value and bargained-for exchange

Answer 30

something of legally sufficient value must be given in exchange for the promise, and

there must be a bargained-for exchange.

Question 31

Value-
do what you have no duty to do (pay for merchandise), perform an act not obligated to do (mow my yard) or refrain from an action you have a right to do (forbearance)

Answer 31

1. A promise to do something that one has no prior legal duty to do.
2. The performance of an action that one is otherwise not obligated to undertake (such as providing accounting services).
3. The refraining from an action that one has a legal right to undertake (called a forbearance).

Question 32

Agreements that lack consideration-preexisting duty, past consideration or illusory promises

Answer 32

preexisting duty:
a promise to do what one already has a legal duty to do does not constitute legally sufficient consideration.

past consideration:
Something given or some act done in the past, which cannot ordinarily be consideration for a later bargain.

illusory promises:
If the terms of the contract express such uncertainty of performance that the promisor has not definitely promised to do anything, the promise is said to be illusory—without consideration and unenforceable.

Question 33

Release of liability

Answer 33

An agreement in which one party gives up the right to pursue a legal claim against another party.

A release will generally be binding if it meets the following requirements:
1. The agreement is made in good faith.
2. The release contract is in a signed writing (required in many states).
3. The contract is accompanied by consideration.

Question 34

covenant not to sue

Answer 34

An agreement to substitute a contractual obligation for another legal action based on a valid claim.

Question 35

Contractual capacity

Answer 35

The capacity required by the law for a party who enters into a contract to be bound by that contract.

Question 36

minors

Answer 36

usually are not legally bound by contracts.

The general rule is that a minor can enter into any contract that an adult can, provided that the contract is not one prohibited by law for minors (such as a contract involving the sale of alcoholic beverages or tobacco products). A contract entered into by a minor, however, is voidable at the option of that minor, subject to certain exceptions. To exercise the option to avoid a contract, a minor need only manifest (clearly show) an intention not to be bound by it. The minor “avoids” the contract by disaffirming it.

Question 37

Necessaries (Minor)

Answer 37

a minor who enters into a contract for necessaries may disaffirm the contract but remains liable for the reasonable value of the goods.

Necessaries include whatever is reasonably needed to maintain the minor’s standard of living. In general, food, clothing, shelter, and medical services are necessaries.

What is a necessary for one minor, however, may be a luxury for another, depending on the minors’ customary living standard. Contracts for necessaries are enforceable only to the level of value needed to maintain the minor’s standard of living.

Question 38

Dissaffirmance (Minor)

Answer 38

The legal avoidance, or setting aside, of a contractual obligation is referred to as disaffirmance.
To disaffirm, a minor must express, through words or conduct, the intent not to be bound to the contract. The minor must disaffirm the entire contract, not merely a portion of it.
For instance, a minor cannot decide to keep part of the goods purchased under a contract and return the remaining goods.

Question 39

ratification (Minor)

Answer 39

In contract law, ratification is the act of accepting and giving legal force to an obligation that previously was not enforceable.
A minor who has reached the age of majority can ratify a contract expressly or impliedly.
Express ratification occurs when the individual, on reaching the age of majority, states orally or in writing an intention to be bound by the contract.
Implied ratification takes place when the minor, on reaching the age of majority, behaves in a manner inconsistent with disaffirmance.

Question 40

intoxicated persons

Answer 40

Intoxication is a condition in which a person’s normal capacity to act or think is inhibited by alcohol or some other drug. A contract entered into by an intoxicated person can be either voidable or valid (and thus enforceable).

If the person was sufficiently intoxicated to lack mental capacity and the other party had reason to know it, then the transaction may be voidable at the option of the intoxicated person, even if the intoxication was purely voluntary. The intoxicated person has the option of disaffirming the contract while intoxicated or for a reasonable time after becoming sober. If, despite intoxication, the person understood the legal consequences of the agreement, the contract is enforceable. (Note that an intoxicated person may ratify a contract expressly or impliedly after becoming sober.)

Courts look at objective indications of intoxication to determine if a person possessed or lacked the required capacity. It is difficult to prove that a person’s judgment was so severely impaired that the person could not comprehend the legal consequences of entering into a contract. Therefore, courts rarely permit contracts to be avoided due to intoxication.

Question 41

mentally incompetent persons

Answer 41

Contracts made by mentally incompetent persons can be void, voidable, or valid. If a court has previously determined that a person is mentally incompetent and has appointed a guardian to represent the person, any contract made by that person is void—no contract exists. Only the guardian can enter into a binding contract on behalf of the mentally incompetent person.

If a court has not previously judged a person to be mentally incompetent but the person was incompetent at the time the contract was formed, the contract is voidable in most states. A contract is voidable if the person was unaware of entering into the contract or lacked the mental capacity to comprehend its nature, purpose, and consequences. In such situations, the contract is voidable (or can be ratified) at the option of the mentally incompetent person but not at the option of the other party.

A contract entered into by a mentally ill person (whom a court has not previously declared incompetent) may also be valid if the person had capacity at the time the contract was formed. Some people who are incompetent due to age or illness have lucid intervals—temporary periods of sufficient intelligence, judgment, and will. During such intervals, they will be considered to have legal capacity to enter into contracts in the majority of states.

Question 42

Legality

Answer 42

Legality is the fourth requirement for a valid contract to exist. For a contract to be valid and enforceable, it must be formed for a legal purpose. A contract to do something that is prohibited by federal or state statutory law is illegal and, as such, is void from the outset and thus unenforceable. Additionally, a contract to commit a tortious act (such as engage in fraudulent misrepresentation) or to commit an action that is contrary to public policy is illegal and unenforceable.

Question 43

Contracts to Commit a Crime

Answer 43

Any contract to commit a crime is in violation of a statute. Thus, a contract to sell illegal drugs in violation of criminal laws is unenforceable, as is a contract to hide a corporation’s violation of securities laws or environmental regulations.

Sometimes, the object or performance of a contract is rendered illegal by statute after the contract has been formed. In that situation, the contract is considered discharged (terminated) by law.

Question 44

usury

Answer 44

Charging an illegal rate of interest.

Question 45

Gambling

Answer 45

Gambling is the creation of risk for the purpose of assuming it. Traditionally, the states have deemed gambling contracts illegal and thus void. Today, many states allow (and regulate) certain forms of gambling, such as horse racing, video poker machines, and charity-sponsored bingo. In addition, nearly all states allow state-operated lotteries and gambling on Native American reservations.

Question 46

Licensing Statutes

Answer 46

All states require members of certain professions—including physicians, lawyers, real estate brokers, accountants, architects, electricians, and stockbrokers—to have licenses. Some licenses are obtained only after extensive schooling and examinations, which indicate to the public that a special skill has been acquired. Others require only that the person obtaining the license be of good moral character and pay a fee.

Whether a contract with an unlicensed person is legal and enforceable depends on the purpose of the licensing statute. If the statute’s purpose is to protect the public from unauthorized practitioners, then a contract involving an unlicensed practitioner generally is illegal and unenforceable. If the purpose is merely to raise government revenues, however, a contract with an unlicensed person may be enforced (and the unlicensed practitioner fined).

Question 47

Contracts in restraint of trade

Answer 47

The United States has a strong public policy favoring competition in the economy. Thus, contracts in restraint of trade (anticompetitive agreements) generally are unenforceable because they are contrary to public policy. Typically, such contracts also violate one or more federal or state antitrust laws.

An exception is recognized when the restraint is reasonable and is an ancillary (secondary, or subordinate) part of the contract. Such restraints often are included in contracts for the sale of an ongoing business and employment contracts.

Question 48

covenant not to compete

Answer 48

A contractual promise of one party to refrain from conducting business similar to that of another party for a certain period of time and within a specified geographical area.

Question 49

Covenants Not to Compete and the Sale of an Ongoing Business.

Answer 49

Many contracts involve a type of restraint called a covenant not to compete, or a restrictive covenant (promise). A covenant not to compete may be created when a merchant who sells a store agrees not to open a new store in a certain geographic area surrounding the old store. Such an agreement enables the seller to sell, and the purchaser to buy, the goodwill and reputation of an ongoing business without having to worry that the seller will open a competing business a block away. Provided the restrictive covenant is reasonable and is an ancillary part of the sale of an ongoing business, it is enforceable.

Question 50

Covenants Not to Compete in Employment Contracts.

Answer 50

Sometimes, an agreement not to compete (also referred to as a noncompete agreement) is included in an employment contract. People in middle-level and upper-level management positions commonly agree not to work for competitors and not to start a competing business for a specified period of time after terminating employment.

Noncompete agreements are generally legal in most states so long as the specified period of time (of restraint) is not excessive in duration and the geographic restriction is reasonable. To be reasonable, a restriction on competition must protect a legitimate business interest and must not be any greater than necessary to protect that interest. What constitutes a reasonable time period may be different in the online environment than in conventional employment contracts. Because the geographical restrictions apply worldwide, the time restrictions may be shorter.

Companies sometimes use covenants not to compete as the starting point for lawsuits against competitors.

Question 51

Contracts Contrary to Public Policy

Answer 51

Although contracts involve private parties, some are not enforceable because of the negative impact they would have on society. These contracts are said to be contrary to public policy.
Examples include a contract to commit an immoral act, such as selling a child, and a contract that prohibits marriage (such as a contract to pay someone not to marry one’s daughter). Business contracts that may be contrary to public policy include contracts in restraint of trade and unconscionable contracts or clauses.

1) commit a crime,
2) usury,
3) gambling
4) licensing statutes make contracts with unlicensed workers are unenforceable

Question 52

Voluntary consent (Mistake)

Answer 52

It is important to distinguish between mistakes of fact and mistakes of value or quality. Only a mistake of fact makes a contract voidable. Also, the mistake must involve some material fact—a fact that a reasonable person would consider important when determining a course of action.

Mistakes of fact occur in two forms—unilateral and bilateral (mutual). A unilateral mistake is made by only one of the contracting parties, whereas a mutual mistake is made by both.

Question 52

Voluntary consent

Answer 52

is lacking if there is mistake, fraud, undue influence or duress

Question 53

Voluntary consent (fraud)

Answer 53

Although fraud is a tort, the presence of fraud also affects the authenticity of the innocent party’s consent to a contract. When an innocent party is fraudulently induced to enter into a contract, the contract usually can be avoided because that party has not voluntarily consented to the terms.Footnote Normally, the innocent party can either rescind the contract or enforce it and seek damages for any harms resulting from the fraud.

Generally, fraudulent misrepresentation refers only to misrepresentation that is consciously false and is intended to mislead another. That is, the person making a fraudulent misrepresentation knows or believes that the assertion is false or knows that there is no basis (stated or implied) for the assertion.Footnote

Typically, fraud involves the following elements:

1. A misrepresentation of a material fact must occur.
2. There must be an intent to deceive.
3. The innocent party must justifiably rely on the misrepresentation.
4. To collect damages, a party must have been harmed as a result of the misrepresentation.

Question 54

Statute of Frauds affects

Answer 54

affects agreements involving real estate, performable in more than a year, involving a collateral promise (guarantor), involving transfer of money or property in contemplation of marriage & sale of goods for more than $500

Question 54

Statements of Opinion

Answer 54

Statements of opinion and representations of future facts (predictions) are generally not subject to claims of fraud. Statements such as “This land will be worth twice as much next year” and “This car will last for years and years” are statements of opinion, not fact. Contracting parties should recognize them as opinions and not rely on them. A fact is objective and verifiable, whereas an opinion is usually subject to debate. Therefore, sellers are allowed to use puffery to sell their goods without being liable for fraud.

Nevertheless, in certain situations, such as when a naïve purchaser relies on an opinion from an expert, the innocent party may be entitled to rescission or reformation. (Recall that reformation is an equitable remedy by which a court alters the terms of a contract to reflect the true intentions of the parties.)

Question 54

Voluntary consent (Undue Influence and Duress)

Answer 54

A contract lacks voluntary consent and is unenforceable if undue influence or duress is present.

Question 55

Statute of Frauds

Answer 55

A state statute that requires certain types of contracts to be in writing to be enforceable.

Question 56

Contracts Involving Interests in Land

Answer 56

A contract calling for the sale of land is not enforceable unless it is in writing or evidenced by a written or electronic memorandum. Land is real property and includes all physical objects that are permanently attached to the soil, such as buildings, fences, trees, and the soil itself. The Statute of Frauds operates as a defense to the enforcement of an oral contract for the sale of land.

Question 57

performable in more than a year

Answer 57

Contracts that cannot, by their own terms, be performed within one year from the day after the contract is formed must be in writing to be enforceable. The reason for this rule is that the parties’ memory of their contract’s terms is not likely to be reliable for longer than a year.

Question 58

collateral promise

Answer 58

A collateral promise, or secondary promise, is one that is ancillary (subsidiary) to a principal transaction or primary contractual relationship. In other words, a collateral promise is one made by a third party to assume the debts or obligations of a primary party to a contract if that party does not perform. Any collateral promise of this nature falls under the Statute of Frauds and therefore must be in writing to be enforceable.

Question 59

Promises Made in Consideration of Marriage

Answer 59

A unilateral promise to make a monetary payment or to give property in consideration of marriage must be in writing.

Question 60

Main purpose rule exception to guarantee must be in writing

Answer 60

the main purpose of the guarantor is to obtain a personal benefit, so that a writing is not required to enforce the guarantee

Question 61

A written contract

Answer 61

must include the names of the parties, the subject matter, reasonably certain terms and the signature of the party or parties charged with performance

Question 62

Parol Evidence

Answer 62

parol evidence rule
A rule of contracts under which a court will not receive into evidence prior or contemporaneous external agreements that contradict the terms of the parties’ written contract.

Question 63

integrated contract

Answer 63

Integrated contracts represent the entire and final agreement between the parties

A written contract that constitutes the final expression of the parties’ agreement. Evidence extraneous to the contract that contradicts or alters the meaning of the contract in any way is inadmissible.

Question 64

condition precedent

Answer 64

A condition in a contract that must be met before a party’s promise becomes absolute.

ex: Life insurance contracts frequently specify that certain conditions, such as passing a physical examination, must be met before the insurance company will be obligated to perform under the contract.

Question 65

condition subsequent

Answer 65

A condition in a contract that, if it occurs, operates to terminate a party’s absolute promise to perform.

ex: after beginning work (the contract) failure to pass a drug test

Question 66

Substantial performance,

but not for personal subject matter – art, custom made articles

Answer 66

A party who in good faith performs substantially all of the terms of a contract can enforce the contract against the other party under the doctrine of substantial performance. Note that good faith is required. Intentionally failing to comply with the terms is a breach of the contract.

The basic requirements for performance to qualify as substantial performance are as follows:

The party must have performed in good faith. Intentional failure to comply with the contract terms is a breach of the contract.

The performance must not vary greatly from the performance promised in the contract. An omission, variance, or defect in performance is considered minor if it can easily be remedied by compensation (monetary damages).

The performance must create substantially the same benefits as those promised in the contract.

Courts decide whether performance was substantial on a case-by-case basis, examining all of the facts of the particular situation.

Question 67

Subsancial Performance: Performance to the Satisfaction of Another

Answer 67

Contracts often state that completed work must personally satisfy one of the parties or a third person. The question is whether this satisfaction becomes a condition precedent, requiring actual personal satisfaction or approval for discharge, or whether the test of satisfaction is performance that would satisfy a reasonable person (substantial performance).

When the subject matter of the contract is personal, a contract to be performed to the satisfaction of one of the parties is conditioned, and performance must actually satisfy that party. For instance, contracts for portraits and works of art are considered personal. Therefore, only the personal satisfaction of the party fulfills the condition (unless a court finds that the party is expressing dissatisfaction to avoid payment or otherwise is not acting in good faith).

Most other contracts need be performed only to the satisfaction of a reasonable person unless they expressly state otherwise. When such contracts require performance to the satisfaction of a third party (such as “to the satisfaction of Robert Ames, the supervising engineer”), the courts are divided. A majority of courts require the work to be satisfactory to a reasonable person. But some courts do require the personal satisfaction of the third party designated in the contract (here, Robert Ames). Again, the personal judgment must be made honestly, or the condition will be excused.

Question 68

anticipatory repudiation

Answer 68

An assertion or action by a party indicating that they will not perform a contractual obligation.

Question 69

Discharge by Mutual Rescission

Answer 69

Recission occurs when the parties cancel their contract and are returned to the positions they occupied prior to the contract’s formation. For mutual rescission to take place, the parties must make another agreement that also satisfies the legal requirements for a contract—there must be an offer, an acceptance, and consideration. Ordinarily, if the parties agree to rescind the original contract, their promises not to perform the acts promised in the original contract will be legal consideration for the second contract.

Generally, a rescission agreement may be written or oral. Oral agreements to rescind most executory contracts are enforceable even if the original agreement was in writing. A writing (or electronic record) is required to rescind a contract for the sale of goods under the Uniform Commercial Code when the contract requires a written rescission. Also, agreements to rescind contracts involving transfers of realty must be evidenced by a writing or record.

When one party has fully performed, an agreement to rescind the original contract usually is not enforceable unless additional consideration or restitution is made. Because the performing party has received no consideration for the promise to call off the original bargain, additional consideration is necessary.

Question 70

novation

Answer 70

The substitution, by agreement, of a new contract for an old one, with the rights under the old one being terminated.

The process of novation substitutes a third party for one of the original parties. Essentially, the parties to the original contract and one or more new parties get together and agree to the substitution. The requirements of a novation are as follows:

1. A previous valid obligation.
2. An agreement by all of the parties to a new contract.
3. The extinguishing of the old obligation (discharge of the prior party).
4. A new, valid contract.

Question 71

Discharge by Operation of Law

Answer 71

Under specified circumstances, contractual duties may be discharged by operation of law. These circumstances include material alteration of the contract, an applicable statute of limitations, bankruptcy, impossibility or impracticability of performance, and frustration of purpose.

Question 72

Material Alteration

Answer 72

To discourage parties from altering written contracts, the law allows an innocent party to be discharged from a contract that has been materially altered. If one party alters a material term of the contract—such as the quantity term or the price term—without the other party’s knowledge, the party who was unaware of the alteration can treat the contract as discharged or terminated.

Question 73

Statutes of Limitations

Answer 73

Statutes of limitations limit the period during which a party can sue on a particular cause of action. After the applicable limitations period has passed, a suit can no longer be brought.

The period for bringing lawsuits for breach of oral contracts is usually two to three years and for written contracts, four to five years. Lawsuits for breach of a contract for the sale of goods must be brought within four years after the cause of action has accrued.Footnote In their original contract, the parties can agree to reduce this four-year period to not less than one year. They cannot, however, agree to extend it beyond four years.

Question 74

Bankruptcy

Answer 74

A proceeding in bankruptcy attempts to allocate a debtor’s assets to the creditors in a fair and equitable fashion. Once the assets have been allocated, the debtor receives a discharge in bankruptcy. A discharge in bankruptcy ordinarily prevents the creditors from enforcing most of the debtor’s contracts. Partial payment of a debt after discharge in bankruptcy will not revive the debt.

Question 75

commercial impracticability

Answer 75

A doctrine that may excuse the duty to perform a contract when performance becomes much more difficult or costly due to forces that neither party could have controlled or foreseen at the time the contract was formed.

Courts may also excuse parties from their performance obligations when the performance becomes much more difficult or expensive than the parties originally contemplated. In one classic case, for instance, a court held that a contract could be discharged because a party would have to pay ten times more than the original estimate to excavate a certain amount of gravel.Footnote

For someone to invoke the doctrine of commercial impracticability successfully, however, the anticipated performance must become extremely difficult or costly.Footnote Furthermore, the added burden of performing must not have been foreseeable by the parties when the contract was made.

Question 76

frustration of purpose

Answer 76

A court-created doctrine under which a party to a contract will be relieved of the duty to perform when the objective purpose for performance no longer exists due to reasons beyond that party’s control.

Closely allied with the doctrine of commercial impracticability is the doctrine of frustration of purpose. In principle, a contract will be discharged if supervening circumstances make it impossible to attain the purpose both parties had in mind when making the contract. As with commercial impracticability, the supervening event must not have been foreseeable at the time of contracting.

There are some differences between the doctrines, however. Commercial impracticability usually involves an event that increases the cost or difficulty of performance. In contrast, frustration of purpose typically involves an event that decreases the value of what a party receives under the contract.

Question 77

Damages

Answer 77

A breach of contract entitles the nonbreaching party to sue for monetary damages. In contract law, damages compensate the nonbreaching party for the loss of the bargain (whereas in tort law, damages compensate for harm suffered as a result of another’s wrongful act). Often, courts say that innocent parties are to be placed in the position they would have occupied had the contract been fully performed.

Question 78

Types of Damages

Answer 78

There are basically four broad categories of damages:

1. Compensatory (to cover direct losses and costs).
2. Consequential (to cover indirect and foreseeable losses).
3. Punitive (to punish and deter wrongdoing).
4. Nominal (to recognize wrongdoing when no monetary loss is shown).

Compensatory and punitive damages were discussed in the context of tort law. Here, we look at these types of damages, as well as consequential and nominal damages, in the context of contract law

Question 79

Compensatory Damages

Answer 79

Damages that compensate the nonbreaching party for the loss of the bargain are known as compensatory damages. These damages compensate the injured party only for damages actually sustained and proved to have arisen directly from the loss of the bargain caused by the breach of contract. They simply replace what was lost because of the wrong or damage, and, for this reason, are often said to “make the person whole.”

Question 80

consequential damages

Answer 80

Foreseeable damages that result from a party’s breach of contract but are caused by special circumstances beyond the contract itself.

Foreseeable damages that result from a party’s breach of contract are called consequential damages, or special damages. They differ from compensatory damages in that they are caused by special circumstances beyond the contract itself. They flow from the consequences, or results, of a breach. When a seller fails to deliver goods, knowing that the buyer is planning to use or resell those goods immediately, a court may award consequential damages for the loss of profits from the planned resale. In the following case, an advertising company sought to recover consequential damages consisting of lost profits that the company claimed had been caused by a delay in the delivery of a customized truck.

Question 81

Punitive Damages

Answer 81

Punitive damages generally are not awarded in lawsuits for breach of contract. Because punitive damages are designed to punish the wrongdoer and set an example to deter similar conduct in the future, they have no legitimate place in contract law. A contract is simply a civil relationship between the parties. The law may compensate one party for the loss of the bargain—no more and no less. In a few situations, when a person’s actions cause both a breach of contract and a tort, punitive damages may be available.

Question 82

nominal damages

Answer 82

A small monetary award (often one dollar) granted to a plaintiff when no actual damage was suffered.

When no actual damage or financial loss results from a breach of contract and only a technical injury is involved, the court may award nominal damages to the innocent party. Nominal damages awards are often small, such as one dollar, but they do establish that the defendant acted wrongfully. Most lawsuits for nominal damages are brought as a matter of principle under the theory that a breach has occurred and some damages must be imposed regardless of actual loss.

Question 83

liquidated damages

Answer 83

An amount, stipulated in a contract, that the parties to the contract believe to be a reasonable estimation of the damages that will occur in the event of a breach.

A liquidated damages provision in a contract specifies that a certain dollar amount is to be paid in the event of a future default or breach of contract. (Liquidated means determined, settled, or fixed.)

Liquidated damages differ from penalties. Although a penalty also specifies a certain amount to be paid in the event of a default or breach of contract, it is designed to penalize the breaching party, not to make the innocent party whole. Liquidated damages provisions normally are enforceable. In contrast, if a court finds that a provision calls for a penalty, the agreement as to the amount will not be enforced, and recovery will be limited to actual damages.

Question 84

mitigation of damages

Answer 84

The requirement that a plaintiff do whatever is reasonable to minimize the damages caused by the defendant’s breach of contract.

In most situations, when a breach of contract occurs, the injured party is held to a duty to mitigate, or reduce, the damages suffered. Under this doctrine of mitigation of damages, the required action depends on the nature of the situation.

Question 85

Equitable Remedies

Answer 85

Sometimes, damages are an inadequate remedy for a breach of contract. In these situations, the nonbreaching party may ask the court for an equitable remedy. Equitable remedies include rescission and restitution, specific performance, and reformation.

Question 86

Rescission

Answer 86

rescission is essentially an action to undo, or cancel, a contract—to return nonbreaching parties to the positions that they occupied prior to the transaction.Footnote When fraud, mistake, duress, undue influence, lack of capacity, or failure of consideration is present, rescission is available. Rescission may also be available by statute.Footnote The failure of one party to perform under a contract entitles the other party to rescind the contract. The rescinding party must give prompt notice to the breaching party.

Rescission of a contract on the basis of a breach is appropriate where the breach is found to be material and willful. A party seeking rescission must also show that the contracting parties can be restored to the status quo. In the following case, a landlord overcharged a tenant certain fees and did not explain how the amount was calculated, as the lease required. The question was whether these circumstances entitled the tenant to rescind the lease.

Question 87

restitution

Answer 87

An equitable remedy under which a person is restored to their original position prior to loss or injury, or placed in the position they would have been in had the breach not occurred.

To rescind a contract, both parties generally must make restitution to each other by returning goods, property, or funds previously conveyed.Footnote If the property or goods can be returned, they must be. If the property or goods have been consumed, restitution must be made in an equivalent dollar amount. Essentially, restitution involves the recapture of a benefit conferred on a defendant who has been unjustly enriched by that benefit.

Question 88

specific performance

Answer 88

An equitable remedy in which a court orders the parties to perform as promised in the contract. This remedy normally is granted only when the legal remedy (monetary damages) is inadequate.

The equitable remedy of specific performance calls for the performance of the act promised in the contract. This remedy is attractive to a nonbreaching party because it provides the exact bargain promised in the contract. It also avoids some of the problems inherent in a suit for monetary damages, such as collecting a judgment and arranging another contract. Moreover, the actual performance may be more valuable (to the promisee) than the monetary damages.

Normally, however, specific performance will not be granted unless the party’s legal remedy (monetary damages) is inadequate.Footnote For this reason, contracts for the sale of goods rarely qualify for specific performance. Monetary damages ordinarily are adequate in sales contracts because substantially identical goods can be bought or sold in the market. Only if the goods are unique will a court grant specific performance. For instance, paintings, sculptures, and rare books and coins are often unique, and monetary damages will not enable a buyer to obtain substantially identical substitutes in the market.

Question 89

Reformation

Answer 89

Reformation is an equitable remedy used when the parties have imperfectly expressed their agreement in writing. Reformation allows a court to rewrite the contract to reflect the parties’ true intentions.

Question 90

privity of contract

Answer 90

Once it has been determined that a valid and legally enforceable contract exists, attention can turn to the rights and duties of the parties to the contract. A contract is a private agreement between the parties who have entered into it, and traditionally these parties alone have rights and liabilities under the contract. This principle is referred to as privity of contract, and it establishes the basic principle that third parties have no rights in contracts to which they are not parties.

Question 91

assignment

Answer 91

The transfer to another of all or part of one’s rights arising under a contract.

Question 92

effect of an assignment

Answer 92

In an assignment, the party assigning the rights to a third party is known as the assignor,
and the party receiving the rights is the assignee.
Other terms traditionally used to describe the parties in assignment relationships are obligee (the person to whom a duty, or obligation, is owed)
and obligor (the person who is obligated to perform the duty).

Question 93

exceptions to right to assign

Answer 93

prohibited by statute
personal services
cause significant change in risk or duties
&contract prohibits assignment

Question 94

When a Statute Expressly Prohibits Assignment

prohibited by statute

Answer 94

If a statute expressly prohibits assignment, the right in question cannot be assigned. For instance, in many states, workers’ compensation statutes prohibit an employee who is receiving benefits from assigning them to another.

Question 95

When a Contract Is Personal in Nature

personal services

Answer 95

When a contract is for personal services, the rights under the contract normally cannot be assigned unless all that remains is a monetary payment.

Question 96

When an Assignment Will Significantly Change the Risk or Duties of the Obligor

cause significant change in risk or duties

Answer 96

A right cannot be assigned if assignment will significantly alter the risks or the duties of the obligor.

Question 97

When the Contract Prohibits Assignment

contract prohibits assignment

Answer 97

If a contract stipulates that the right cannot be assigned, then ordinarily it cannot be assigned. This restraint operates only against the parties themselves. It does not prohibit an assignment by operation of law, such as an assignment pursuant to bankruptcy or death.

Whether an antiassignment clause is effective depends, in part, on how it is phrased. A contract that states that any assignment is void effectively prohibits any assignment.

Question 98

delegation of duties

Answer 98

The transfer to another of a contractual duty.

Question 99

Delegations

Answer 99

Just as a party can transfer rights to a third party through an assignment, a party can also transfer duties. Duties are not assigned, however. They are delegated. Normally, a delegation of duties does not relieve the party making the delegation (the delegator) of the obligation to perform in the event that the party to whom the duty has been delegated (the delegatee) fails to perform.

No special form is required to create a valid delegation of duties. As long as the delegator expresses an intention to make the delegation, it is effective. The delegator need not even use the word delegate. Exhibit 18–2 illustrates delegation relationships.

Question 100

exceptions to general right to delegated

Answer 100

As a general rule, any duty can be delegated. This rule has some exceptions, however. Delegation is prohibited in the following circumstances:

1. When performance depends on the personal skill or talents of the obligor. (personal services)
2. When special trust has been placed in the obligor. (special trust (guardian))
3. When performance by a third party will vary materially from that expected by the obligee. (performance would vary considerably from that expected by obligor)
4. When the contract expressly prohibits delegation. (contract prohibition)

Question 101

When the Duties Are Personal in Nature

Answer 101

When special trust has been placed in the obligor or when performance depends on the obligor’s personal skill or talents, contractual duties cannot be delegated.

Question 102

When Performance by a Third Party Will Vary Materially from That Expected by the Obligee

Answer 102

When performance by a third party will vary materially from that expected by the obligee under the contract, contractual duties cannot be delegated.

Question 103

When the Contract Prohibits Delegation

Answer 103

When the contract expressly prohibits delegation by including an antidelegation clause, the duties cannot be delegated.

Question 104

third party beneficiary

Answer 104

One who is not a party to the contract but who stands to benefit from the contract’s performance.

Question 105

Third Party Beneficiaries

Answer 105

Another exception to the doctrine of privity of contract arises when the contract is intended to benefit a third party. The original parties to a contract can agree that the contract performance should be rendered to or directly benefit a third person. When this happens, the third person becomes an intended third party beneficiary of the contract. As the intended beneficiary of the contract, the third party has legal rights and can sue the promisor directly for breach of the contract.

Question 106

intended beneficiary

Answer 106

A third party for whose benefit a contract is formed. An intended beneficiary can sue the promisor if the contract is breached.

Question 107

incidental beneficiary

Answer 107

A third party who benefits from a contract even though the contract was not formed for that purpose. An incidental beneficiary has no rights in the contract and cannot sue to have it enforced.

Sometimes, a third person receives a benefit from a contract even though that person’s benefit is not the reason the contract was made. Such a person is known as an incidental beneficiary. Because the benefit is unintentional, an incidental beneficiary cannot sue to enforce the contract. Only intended beneficiaries acquire legal rights in a contract.