CHAPTER 10

1. CHAPTER 10 Conclusion to Contracts

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3. Quote of the Day “A verbal contract isn’t worth the paper it’s written on.” Samuel Goldwyn, Hollywood producer

4. The Statute of Frauds • Many agreements are unenforceable, unless it, or some memorandum of it, is in writing and signed. Includes contracts: • For any interest in land • That cannot be performed within one year • To pay the debt of another • Made by an executor of an estate • Made in consideration of marriage; and • For the sale of goods over $500 • Once a contract is fully executed, it makes no difference that it was unwritten. (The contract is not void.)

5. Agreement for Interest in Land • A contract for interest in land must be in writing to be enforceable. • Exception: Full Performance by the Seller • Exception: Part Performance by the Buyer • the buyer of land may be able to enforce an oral contract if she paid part of the price and either entered the land or made improvements to it. • Exception: Promissory Estoppel • If a promisor makes an oral promise that should reasonably cause the promisee to rely on it, and the promisee does rely, the promisee may be able to enforce the promise.

6. One Year Rule • Promises that cannot be performed in one year or less are unenforceable unless in writing. • Key phrase is “cannot be performed” – not “isn’t performed.” It may be possible to perform a contract in less time than the actual time ends up being.

7. Promise to Pay Debt of Another • When one person agrees to pay the debt of another as a favor to that debtor, it is called a collateral promise and must be in writing to be enforceable. • Exception: if the promisor will also benefit from the leading object of the transaction, the contract does not have to be written.

8. Promise Made by an Executor of an Estate • An executor’s promise to use her own funds to pay a debt of the deceased must be in writing to be enforceable.

9. Marriage Promises • A promise made in consideration of marriage must be in writing to be enforceable. • This applies to those, “If you marry me, I’ll give you a million dollars” types of promises.

10. What the Writing Must Contain • The contract or memorandum must be signed by the defendant, and • It must state with reasonable certainty: • the name of each party • the subject matter of the agreement, and • all of the essential terms and promises. Click here to go to the internet for samples of written contracts.

11. Sale of Goods -- UCC §2-201(1) - The Basic Rule • A contract for sale of goods worth more than $500 is not enforceable unless there is some writing, signed by the defendant, indicating that the parties reached an agreement. Click to read the Uniform Commercial Code on the internet.

12. Parol Evidence • Parol evidence refers to anything (apart from the written contract itself) that was said, done, or written before the parties signed the agreement or as they signed it.

13. The Parol Evidence Rule • When two parties make an integrated contract, neither one may use parol evidence to contradict, vary, or add to its terms. • Parol evidence refers to anything (apart from the written contract itself) that was written, said or done in the discussions leading up to the contract. • Integrated contract means a writing that both parties intend as a final, complete expression of their agreement.

14. Third Party Beneficiary • A third party beneficiary is someone who was not a party to the contract but stands to benefit from it. • A third party beneficiary may be an intended, incidental or a creditor beneficiary.

15. Third Party Beneficiary (cont’d) • An intended beneficiary may enforce a contract if the parties intended her to benefit and if either: • enforcing the promise will satisfy a duty of the promisee to the beneficiary; or • the promisee intended to make a gift to the beneficiary. • Any beneficiary who is not an intended beneficiary is an incidental beneficiary, and may not enforce the contract. • If the promisee is fulfilling some duty, the third party beneficiary is called a creditor beneficiary.

16. Assignment and Delegation • A contracting party may transfer his rights under the contract, which is called an assignment of rights. • A contracting party may transfer her duties pursuant to the contract, which is a delegation of duties. • The assignor is the one making an assignment and the assignee is the one receiving an assignment.

17. Assignment • Any contractual right may be assigned unless assignment: • (a) would substantially change the obligor’s rights or duties under the contract; or • (b) is forbidden by law or public policy; or • (c) is validly precluded by the contract itself. • Writing is required only if governed by statute of frauds.

18. Rights of the Parties after Assignment • Once the assignment is made and the obligor notified, the assignee may enforce her contractual rights against the obligor. • The obligor may generally raise all defenses against the assignee that she could have raised against the assignor.

19. Delegation of Duties • Most duties are delegable. But delegation does not by itself relieve the delegator of his own responsibility to perform the contract. • An obligor may delegate unless • (1) delegation would violate public policy, or • (2) the contract prohibits delegation, or • (3) the obligee has a substantial interest in personal performance by the obligor.

20. Novation • A novation is a three-way agreement in which the obligor delegates all duties to the delegatee and the obligee agrees to look only to the delegatee for performance. • The obligee releases the obligor from all liability.

21. Discharge • A party is discharged when she has no more duties under a contract. • Most contracts are discharged by full performance. • Sometimes the parties discharge a contract by agreement. • Rescind means that they terminate it by mutual agreement.

22. Conditions • A condition is an event that must occur before a party becomes obligated under a contract. • How Conditions are Created • Express Conditions -- No special language is necessary to create the condition, but it must be stated clearly somehow. • Implied Conditions – The condition is not stated, but is clear from the agreement.

23. Types of Conditions • Condition Precedent • Must occur before a duty arises. • Condition Subsequent • Must occur after the particular duty arises. • Concurrent Conditions • Certain things must occur simultaneously.

24. Performance • Strict Performance • Performance that is exactly what promised; is usually not expected and failure to do so does not cause for discharge. • Substantial Performance • A party that substantially performs its obligations will receive the full contract price, minus the value of any defects. • A party that fails to perform substantially receives nothing on the contract and will only recover the value of the work, if any.

25. Personal Satisfaction Contracts • A personal satisfaction contract is one which the promisee makes a personal, subjective evaluation of the promisor’s performance. • A court uses a subjective standard only if assessing the work involves feelings, taste, or judgment and the contract explicitly demands personal satisfaction. • In all other cases, a court applies an objective standard to the decision.

26. Good Faith • The Restatement (Second) of Contracts §205 states: “Every contract imposes upon each party a duty of good faith and fair dealings in its performance and its enforcement.”

27. Time of the Essence Clauses • A time of the essence clause will generally make contract dates strictly enforceable. • Merely including a date for performance does not make time of the essence.

28. Breach • Material Breach • Generally courts will discharge only if a party committed a material breach. • Anticipatory Breach • Anticipatory breach is committed by one party making it unmistakably clear that he will not honor the contract. • Statute of Limitations • Will limit the time within which the injured party may file suit.

29. Impossibility • True Impossibility • Something has happened making it utterly impossible to fulfill the promise. • Commercial Impracticability • Some event has occurred that neither party anticipated, making the contract extra-ordinarily difficult and unfair to one party. • Frustration of Purpose • Some event has occurred that neither party anticipated and the contract now has no value for one party.

30. Breaching the Contract • Someone breaches a contract when he fails to perform a duty without a valid excuse. • A remedy is the method a court uses to compensate an injured party. • An order forcing someone to do something, or refrain from doing something, is an injunction.

31. Identifying the “Interest” • Expectation Interest • Reliance Interest • Restitution Interest • Equitable Interest • These interests and their remedies will be discussed on the next few slides.

32. Expectation Interest • Designed to put the injured party in the position she would have been in had both sides fully performed their obligations. • Damages awarded may be: • Compensatory damages • Consequential damages • Incidental damages

33. Compensatory Damages • Compensatory damages are the most common monetary awards for the expectation interest. • They generally flow directly from the contract, such as an order to pay what was promised or to pay for expenses caused by the breach. • The injured party must prove the breach caused damages that can be quantified with reasonable certainty.

34. Consequential Damages • Consequential damages are those resulting from the unique circumstances of this injured party. • Because damage calculation can be complex, there are companies that specialize in doing the work on behalf of litigants or other interested parties. Click here for the web page of a damage calculation company.

35. Incidental Damages • Incidental damages are the relatively minor costs incurred when the injured party responds to the breach (obtaining cover), such as the extra cost of buying replacement goods. Big Bob can recover incidental damages of the extra $250 from Acme. Acme agrees to sell 1000 widgets to Big Bob’s for $1 each, but fails to deliver. Big Bob has to buy 1000 widgets from ConCo for $1.25 each.

36. Reliance Interest • Reliance interest is when one party acts in reliance on the contract and the other party defaults. • Remedies are designed to put the injured party in the position he would have been in had the parties never entered into a contract. • Reliance damages are awarded in cases of promissory estoppel.

37. Restitution Interest • Designed to return to the injured party a benefit that he has conferred on the other party, which it would be unjust to leave with that person. • May be accompanied by rescission, or the “undoing” of a contract.

38. Equitable Interest • When money is not sufficient to help the injured party, a court may order a transfer of property or may issue an injunction to prevent a particular action from continuing. • Restitution in Cases of a Valid Contract • Restitution is a common remedy in contracts involving fraud, misrepresentation, mistake, and duress. • Restitution in Cases of Quasi-Contract • A court may award restitution, even in the absence of a contract, where one party has conferred a benefit on another and it would be unjust for the other party to retain the benefit.

39. Other Equitable Interests • Specific Performance • A court will order the parties to perform the contract only in cases involving the sale of land or some other asset that is unique. • Injunction • An injunction is a court order that requires someone to do something or refrain from doing something. • Reformation • Reformation is a process in which a court will partially “re-write” a contract.

40. Special Issues of Damages • Mitigation of Damages • A party may not recover for damages that could be avoided with reasonable efforts. • A liquidated damages clause is a provision stating in advance how much a party must pay it if it breaches. • A court will generally enforce a liquidated damages clause if: • (1) at the time of creating the contract it was very difficult to estimate actual damages, and • (2) the liquidated amount is reasonable.

41. “The flexible powers of a court should enable it to craft just compensation for an injured party, but problems of proof demonstrate that the best solution is a carefully drafted contract and socially responsible behavior.”