R6.1 – Contracts Flashcards
Sources of Contract Law
1. Common Law – Developed in judicial decisions on contracts
– Applies to
– Real estate
– Insurance
– Services
– Employment
- Uniform Commercial Code – Codified in statutory form
– Article 2 applies to contracts for the sale of goods (moveable things)
Contract Defined
Contract =
- an agreement
- supported by consideration
- between two or more persons
- with competent capacity
- for a legal purpose that the law will enforce
Types Of Contracts – Method of Formation
Express contract = contract formed by language, oral and/or written
Implied-in-fact contract = formed by conduct of parties
Quasi-contract or implied-in-law contract = a remedy imposed by a court to prevent unjust enrichment
Types of Contracts – Promises Made
Unliateral contract = promise for action
– Contract not formed until performance completed
BIlateral contracts = promise for promise
– Contract formed when promises exchanged
Types of Contracts – Stage of Performance
Executed Contract = fully performed by all parties to contract
Executory contract = parties have not performed or only partly performed
Type of Contract – Valid, void, voidable, and unenforceable contracts
Valid contract = legally formed and meets the necessary requirements for formation
Void contract = lack legal purpose or is in violation of the law
– Courts can’t enforce
Voidable contract = otherwise valid contract that can be set aside by one party
– Includes contracts that involved fraud in formation or the protected party lacked the required capacity to form contracts.
Unenforceable contract = otherwise valid contract that can not be enforced because of a statutory or other legal defense
– Court can not enforce but parties can still honor contract
Elements of a Contract
Agreements
– Offer
– Acceptance
Consideration
Lack of defenses
Offer – Requirements
- Intent to contract
- Definite and certain terms
- Communication of offer
Offer – Requirements: Definite and Certain Terms
- Offeree
- Subject matter
- Price to be paid
- Time of performance
- Quantity involved
- Nature of work to be performed
Offer – Termination
Termination by offeror (revocation)
Termination by offeree (rejection)
Operation of law
Offer – Termination by offeror (revocation)
Offeror can revoke offer at any time before offer is accepted
Effective when received by offeree (or when published)
Offer – Irrevocable Offers
Option contract = Promisor promises to keep offer open in exchange for consideration from promisee
– Offeror can’t withdraw offer during option period
Unilateral contract
– Offeror can’t revoke once offeree begins to perform
Merchant’s firm offers under UCC = UCC Article’s 2 form of option contract
– Can not be revoked by merchant
Requirements of merchant firm offer – In writing – Made by merchant – States that it will be kept open for a given amount of time (max 3 months) – Does not require consideration
Offer – Termination by offeree (rejection)
Methods of rejection
– Express rejection
– Counter offer = rejection of old offer and giving new offer
– Letting time lapse
Inquiry is not a reject or counteroffer
Rejection effective when received
Common law: mirror image rule
– Acceptance must mirror offer; any deviation is a counteroffer which includes a rejection
Offer – Termination by operation of the Law
Death or incompetence of parties prior to acceptance
– Does not have to be communicated to other party
– Does not terminate option contract
Termination by destruction of subject matter before acceptance
Termination by illegality – subject matter of contract becomes illegal
Acceptance
Only the offeree may accept
– Contracts are generally not assignable
– Exception: option contracts are assignable
Offeree’s silence is not acceptance
Must use reasonable method
– Unless otherwise stated, must use specified method
– If no method specified, acceptance effective when sent by any reasonable means
Mirror image rule
– Acceptance must be mirror image of the offer, except in contracts for the sale of goods
Mailbox rule
– Acceptance effective when dispatched as long as it is properly addressed
– Offeror can opt out of mailbox rule by including other conditions in offer
Consideration
Consideration = price of contracting
Both side of contract must be supported by legally sufficient considerations
– The law does not enforce gratuitous promise
Elements of consideration
– Legal value
– Adequate
– Bargained for exchange
Consideration – Legal Value
Legal value
= detriment to promisee and/or benefit to promisor
Doesn’t have to be monetary value
Doesn’t have to go to one of parties in contract
Can’t be something promisee already obligated to
– Preexisting duty rule - if already legally bound to perform, not adequate consideration
Consideration – Adequacy
Courts don’t generally inquire into adequacy of consideration
Key is whether value promised is legally sufficient so as not to be considered a gift
Consideration – Bargained for Exchange
Something is not consideration unless it was given in exchange for other consideration
Can’t claim more payment for what you are already legally obligated to do
Promissory estoppel
Promissory Estoppel – A promise made by one party and detrimentally relied upon by another can be enforced without consideration
Reliance on promise must be reasonable
Detriment occurred due to reliance on promise
Defenses
Defenses can make a contract void or unenforceable
9 types of defenses to formation of contract
- Mistake
- Fraud
- Innocent misrepresentation
- Duress
- Undue Influence
- Capacity
- Statute of Frauds
- Issues with Performance
- Unconscionability
Defenses – Mistake
Unilateral mistake = mistake by 1 of the parties
Mutual mistake = mistake by both parties
Unilateral Mistake binding on mistaken party unles
– Other party knows or should have known of mistake, or
– Mistake is material and obvious, or
– Error is due to mathematical calculation made inadvertently and not through gross negligence
Mutual mistake cant be enforced if mistake involves – identity – existence, or – amount of subject matter = Void contract
Mistakes as to value = enforceable contract
Defenses – Fraud
Must prove
- Misrepresentation of a material fact
- Scienter – intent to defraud or reckless disregard of truth
- Intent to induce plaintiff’s reliance
- Actual and justifiable reliance by plaintiff
- Damages
Opinions or statements of value do not constitute facts to be reasonably relied upon unless made by experts
Fraud in the execution = Party deceived into signing something that he does not know is a contract
– Void contract
Fraud in the inducement = Party aware signing contract but terms are materially misrepresented
– Voidable contract
Defenses – Innocent Misrepresentation
Innocent misrepresentation = same as fraud but no scienter
- Misrepresentation of a material fact
- Intent to induce plaintiff’s reliance
- Actual and justifiable reliance by plaintiff
- Damages
Defenses – Duress
Party’s free will to enter contract overcome by unlawful use of threat or harm
Physical harm = void contract
Economic or social harm = voidable contract
Merely taking advantage of a person’s economic condition to negotiate a favorable contract is not duress.
Defenses – Undue Influence
Party’s free will to contract overcome by defendant’s abuse of a position of trust or confidence
Voidable contract
Defenses – Illegality
Subject matter is illegal
Illegal contracts are void
Failure to have a required license makes all contracts void
– License was for protection of public = void contract
– Exception: License was a mere revenue-raising measure = enforceable contract
Covenants not to compete are valid in sale of business contracts and employment contracts if
– reasonably needed
– reasonable as to time, and
– reasonable as to distance
Contracts contrary to public policy are void.
Defenses – Age Capacity
Minors can enter contract but have extra protections
Minors may disaffirm anytime during minority and within a reasonable time after becoming an adult.
They can ratify once they reach the age of majority by
– Failing to disaffirm within a reasonable amount of time
– Expressly ratifying
– Retaining the benefits
Minor bound for contract for necessities
– Must not be under care for parent or guardian
– Can disaffirm, but still liable for reasonable value of goods used
Defenses – Mental Capacity
Contract made by mentally incompetent person is void
Intoxication is only a defense when the intoxication is so sever that it prevents the person from understanding the nature of the contract and the other party knew of impairment
Defenses – Statute of Frauds
6 types of contracts need to be in writing to be enforceable
- Marriage is the consideration
- Contracts that by their terms cannot be performed within one year
- Land contracts
- Contracts by executors to pay estate debts out of personal funds
- Sale of goods for $500 or more
- Contracts to act as a surety
Need only be signed one party, but can only be enforced against the once who signed.
Terms can be stated in more than one document
Defenses – Performance
Event occurs that makes it impossible for anyone to perform
= further duty to be performed discharged
E.g. destruction of subject matter, death of party to perform services
Defenses – Unconscionability
A claim that a contract includes an extremely unfair term arising from circumstances surrounding the deal, such as a disclaimer hidden in small print or the inability of a party to deal with someone else
Accord and Satisfaction and Substitute Contract
Accord = agreement to substitute one contract for another, and satisfaction is the execution (performance) of the accord.
Until the accord is completed, a party may sue under the original contract
A substituted contract discharges the original contract immediately
Novation
Occurs when a new contract substitutes a new party for an old party in an existing contract
All of the parties agree that the old party is immediately released from liability.
Parole Evidence Rules
Can’t use prior oral or written evidence or contemporaneous oral statements to contradict the terms of a fully integrated written contract
Fully integrated written contract = written contract that appears to be intended to reflect the entire agreement between the parties
Oral or written modifications made after contract entered into are admissible
Parol evidence admissible it shows meaning of ambiguous term.
Parol evidence admissible to show fraud, duress, mistake etc.
Note: Examiners like to combine parole evidence with Statute of Frauds issues
- Determine whether modification is enforceable, then
- Determine if admissible in evidence
Breach
Material or Substantial Breach
– Common law: Nonbreaching party can be discharged from the contract if there is a material breach; if a breach is minor, no discharge just damages
– Sales Article: Nonbreaching party can be discharged for any breach, even a minor one
Anticipatory Repudiation (breach in advance)
– Nonbreaching party can treat as a breach and cancel the contract, immediately sue for damages, or
– Ignore the repudiation, wait for performance and, if no performance, sue for damages.
Remedies
Damages = monetary recovery
Remedies in equity
Remedies – Damages
Nominal damages
Compensatory damages = Puts non breaching party in the position he would have been in had there been no breach
– Allows non breaching party to obtain substitute performance
Consequential damages = For reasonably foreseeable losses
Liquidated damages = Damages agreed to in the contract
– Must be reasonable and not a penalty
Punitive damages = To punish the defendant
– Usually not available for breach of contract, unless there was fraud in inducement or formation
Remedies – Remedies in Equity
Specific Performance (for land and unique items)
– A court order requiring the breaching party to perform
– Can receive specific performance or compensatory damages but not both
Rescision or Cancellation
– Cancel the contract and return parties to their original positions
Reformation
– Contract rewritten to correct imperfectly expressed contract
Third Party Rights – Types of 3rd parties
- Third party beneficiaries
- Assignees
- Delegates
Third Party Rights – Third Party Beneficiaries
Must be intended beneficiaries
Promissor owes duty under 3rd party contract
Promisee bargained for performance
Donne beneficiary – receives benefit from contract as gift (from promisee)
Creditor beneficiary – receives benefit because promisee owes then something
Intended beneficiary can sue promisor if promisor fails to perform
Creditor beneficiaries can sue promisee for failure to fulfill original obligation of promissee
Donnee beneficiaries can not sue promisee because gifts not enforceable
Third Party Rights – Assignees and Delegates
Assignment of rights gives contract rights to 3rd party
– Assignor = party giving right to 3rd party
– Assignee = 3rd party receiving rights
Delegation of duties = 3rd party performs contractual rights
Note: “assignment of all rights under a contract” = assignment of a contract = assignment + delegation
Third Party Rights – Assignees and Delegates: Assignment
Can generally assign any rights and delegate and contract duty
– Can assign option
– Can’t assign if assignment changes obligor’s risk
– Can’t delegate a duty involving specialized personal services or a duty that relies heavily on the personal attributes of the person performing
– Can’t assign offers (offers ≠ contracts)
Assignment does not have to be in writing, or supported by consideration
Assignment must be communicated to 3rd party
Obligor can raise any defense against assignee that he can raise against assignor.
Third Party Rights – Assignees and Delegates: Assumed mortgages & Assignment by creditor of right to receive payment
Assumed mortgages – both party liable
– “Subject to mortgage” – Person who takes “subject to mortgage” not liable; other party liable
Assignment by creditor of right to receive payment not effective against debtor until debtor receives notice of assignment
– If after notice received, debtor pays assignor instead, debtor still has duty to pay assignee
Third Party Rights – Assignees and Delegates: Implied warranties of assignor
That he has the rights assigned
That he won’t interfere with rights he has assigned
That he has no knowledge of any impairment of value of assignment
That if assignor breaches the warranties he is liable for damages
Third Party Rights – Assignees and Delegates: Delegation
Delegation does not release original party from contract
– Both designor and designee are liable unless there is a novation
– Party to whom duty owed can sue either one in an order, but can only get one recovery
