Issues Affecting Formation of Contracts

Question 1

Parol Evidence Rule

Answer 1

The Parol Evidence Rule provides that where the parties have entered into an agreement that has been reduced to writing with the intent being to make that writing a final and complete expression of their contract, no evidence of a prior or contemporaneous agreement can by introduced to change the terms of that written contract.
Even though the term “parol” is generally used to mean the same thing as “oral,” the Parol Evidence Rule, as traditionally applied, prohibits introduction of any evidence,whether written or oral, where such evidence relates to a prior or contemporaneous agreement and is being introduced to change the terms of the written agreement. Therefore, the purpose of the rule is to lend certainty to the terms of written contracts by making it such that the parties to the contract are prevented from later contending that the contract did not really represent the full understanding of the parties.

Question 2

Parol Evidence Rule under the UCC

Answer 2

The Parol Evidence Rule is interpreted more liberally under the UCC. The court must specifically find that the parties intended the writing to be the final agreement before extrinsic evidence will be excluded. The contract may be explained or supplemented by parol evidence as to course of performance, course of dealing, or usage of trade.

Question 3

Course of Performance

Answer 3

Course of performance refers to pattern of conduct that is established when a contract requires more than one performance. Once the party has completed one or more of a series of performances required by the contract, and the other party has not objected to such performance, a pattern may be established and used to interpret what the parties’ intent was regarding the remaining performances. No specific number of performances is required; however, the more performances already completed without objection, the more likely it is that a court will determine that a pattern for interpretation has been established.

Question 4

Course of Dealing

Answer 4

Course of dealing refers to a pattern of previous conduct between the parties which can be fairly regarded as establishing a common basis of understanding for interpreting their current expressions and conduct.

Question 5

Usage of Trade

Answer 5

Usage of trade refers to a customarily observed practice or method within a trade, vocation, or locale. Where a trade usage exists, it may be offered as evidence to justify an expectation that the practice or method would be observed with respect to the transaction in question. The existence and scope of such a usage are questions of fact that must be proved. If such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law.

Question 6

Exceptions to Parol Evidence Rule

Answer 6

The Parol Evidence Rule does not apply to the following: proof of lack of formation of contract, i.e., lack of consideration, use of fraud, duress, mistake, ambiguity, etc.; proof of a condition precedent to legal effectiveness of the written agreement; naturally omitted terms which were the subject of a collateral agreement or which were supported by separate consideration; or evidence which proves that a modification occurred.

Question 7

Collateral Agreement Doctrine

Answer 7

The Collateral Agreement Doctrine holds that additional terms which were intended by the parties and included in a separate agreement may be enforced even though such terms were not included in the original contract if this collateral agreement is one which 1) does not contradict any express provision of the main contract and 2) might naturally be made as a separate agreement between the parties. Therefore evidence related to a collateral agreement will not be excluded under the Parol Evidence Rule.

Question 8

Adhesion Contract

Answer 8

An adhesion contract is a contract drafted by the stronger of two parties, with terms favoring the stronger party, and offered to the weaker party with little or no negotiation as to the already-drafted terms.

Question 9

Mutual Mistake

Answer 9

A mutual mistake occurs when both parties to a contract have an erroneous belief related to the facts or to the contents or effects of a writing, at the time of the creation of the contract. The court may revise, void or rescind the contract if the plaintiff can show that the mistake concerns a basic assumption upon which the contract was made, the mistake had a major effect on the fairness of the deal, and the risk of this type of mistake was not allocated to the plaintiff.

Question 10

Unilateral Mistake

Answer 10

A unilateral mistake occurs when only one party to a contract has an erroneous belief related to the facts or to the contents or effect of a writing, at the time of the creation of the contract. The court may revise, void or rescind the contract if the plaintiff can show that the mistake concerns a basic assumption on which the contract was made, the mistake had a major effect on the fairness of the deal, the risk of this type of mistake was not allocated to the plaintiff, and either that enforcement of contract would be unconscionable or the other party had reason to know of the mistake or actually caused it.

Question 11

Misrepresentation

Answer 11

Under contract law, misrepresentation occurs when one party to a contract intentionally, negligently, or even innocently makes a false statement of material fact, misleads the other by telling a half truth or by acting to conceal the truth, or has a fiduciary duty to the other party and fails to disclose a material fact. The court may void or rescind the contract, or may award damages if it is proved that the innocent party justifiably relied on the misrepresentation in making the contract. If the misrepresentation was made intentionally or recklessly, a separate action may lie in fraud.

Question 12

Power of Disaffirmance

Answer 12

A legally immature or mentally incapacitated person has the power to disaffirm a contract by manifesting to the other party an unwillingness to continue to be bound by the contract. But for all other purposes the contract is valid unless and until it is disaffirmed.

Question 13

Merit Music v. Sonneborn

Answer 13

In the case of Merit Music v. Sonneborn, the court held that in the absence of fraud, duress, or material mistake, a party to a contract with the capacity to understand a written document will be bound by his or her signature whether or not he read the document.

Question 14

Statute of Frauds

Answer 14

The doctrine of the Statute of Frauds was enacted in England centuries ago and remains in effect today by statute. It was established to guard against fraud and perjury in contract actions by requiring that certain types of contracts be evidenced by a writing signed by the party to be charged, the defendant in a civil action. Those contracts which are customarily within the Statute of Frauds are:

1) a contact which, by its terms, cannot be performed within one year from the making thereof,
2) a promise to answer for the debt or default of another,
3) a promise in consideration of marriage,
4) a contract involving an interest in real property, and
5) under the UCC, a contract for the sale of goods priced $500 or more.

Question 15

Guaranty

Answer 15

A guaranty is a promise to answer for the debt, default, or miscarriage of another.

Question 16

Statute of Frauds Requirements under UCC

Answer 16

A guaranty is a promise to answer for the debt, default, or miscarriage of another.

Question 17

Exceptions to the Statute of Frauds

Answer 17

A contract is exempt from the Statute of Frauds—that is, a signed writing is not required—in the following circumstances:
1) a sufficient memorandum of the agreement is available;
2) part performance of the contract has occurred; however, the contract may be enforceable only to the extent of completed performance;
3) the doctrine of promissory estoppel can be justly applied;
4) the contract involves payment of another’s debt or default, but the main purpose of the contract was a different purpose;
5) the contract cannot be fully performed within one year, but one party has already fully performed; or
6) under the UCC, where:
a) a sales confirmation signed by the sender was received but not objected to within 10 days of receipt;
b) the contract deals with goods to be specially manufactured and the seller has made either a substantial beginning of their manufacture or commitments for their procurement prior to receiving repudiation;
c) the party against whom enforcement is sought admits in court that a contract was made, but the contract is not enforceable beyond the quantity of goods admitted;
payment has been made, but the contract is not enforceable beyond the payment; or
e) the goods have been received and accepted, but the contract is not enforceable beyond the quantity of goods received and accepted.

Question 18

Ambiguity

Answer 18

A contract is ambiguous when, examining the contract as a whole in light of the circumstances at the time of its creation, the meaning of the contract is uncertain or material terms of the contract could reasonably be interpreted in two or more inconsistent ways.

Question 19

Illegality

Answer 19

If the subject matter of a contract is unlawful, the contract is unenforceable.

Question 20

Duress

Answer 20

Where one party uses coercion which is subjectively great enough to overcome the free will of another, thereby inducing the other to enter or modify a contract, the contract or modification may be set aside.

Question 21

Unconscionable Contract

Answer 21

An unconscionable contract is a contract with a provision that no fair and honest person would make and no person in his or her right mind would accept. Such contracts are usually agreed to through “oppression” in that the promisee knows that he or she is giving up his or her rights but is forced to if he or she wishes to purchase the subject product. Or, he or she is not aware of the rights that are being given up but through “unfair surprise” (such as small print or vagueness in terms) signs the contract anyway.