Contracts Outline

I. II. III. IV. V. VI. VII. POLICY CONSIDERATIONS………………………………………………………... 1 RELEVANT UCC BACKGROUND………………………………………………….. 1 CONSIDERATION…………………………………………………………………….. 1 a. Background…………………………………………………………………………... 1 b. Nominal Consideration and Intent to Contract………………………………………. 2 c. Mixed Motives and Adequacy……………………………………………………….. 3 d. Pre-Existing Duties and Modification……………………………………………….. 4 e. Discretion and Implied Obligation…………………………………………………... 5 f. Moral Obligation and Past Consideration…………………………………………… 6 g. Promissory Estoppel…………………………………………………………………. 7 AGREEMENT………………………………………………………………………….. 8 a. Mutual Assent………………………………………………………………………... 8 b. Offer and Ads………………………………………………………………………. 10 c. Methods of Acceptance…………………………………………………………….. 12 d. Option Contacts…………………………………………………………………….. 15 e. Battle of the Forms…………………………………………………………………. 16 f. Shrink-Wrap and Browse-Wrap……………………………………………………. 17 g. Pre-Contractual Liability…………………………………………………………… 19 h. Unjust Enrichment………………………………………………………………….. 20 THINGS THAT MAKE CONTRACTS UNENFORCEABLE…………………….. 21 a. Statute of Frauds……………………………………………………………………. 21 b. Lack of Capacity of Authority……………………………………………………… 23 c. Mistake……………………………………………………………………………... 23 d. Misrepresentation…………………………………………………………………... 25 e. Duress………………………………………………………………………………. 26 f. Unconscionability…………………………………………………………………... 27 g. Illegality and Public Policy…………………………………………………………. 30 DETERMINING THE SCOPE OF CONTRACTUAL DUTIES………………….. 31 a. Parol Evidence Rule………………………………………………………………... 31 b. Interpretation……………………………………………………………………….. 35 c. Duty of Good Faith…………………………………………………………………. 36 d. Employment Contracts……………………………………………………………... 38 e. Warranties…………………………………………………………………………... 38 f. Express Conditions…………………………………………………………………. 39 g. Constructive Conditions……………………………………………………………. 40 h. Excuse of Express Conditions……………………………………………………… 40 i. Material Breach and Substantial Performance……………………………………... 42 j. Excuse from Performance - Impracticability………………………………………. 44 k. Excuse from Performance - Frustration of Purpose………………………………... 47 REMEDIES FOR BREACH………………………………………………………….. 47 a. Arbitration………………………………………………………………………….. 47 b. Defensive Rights: Right to Suspend Performance or Cancel………………………. 48 c. Affirmative Remedies: Money Damages vs. Specific Performance……………….. 49 d. Money Damages: Limits on Recovery……………………………………………... 51 e. Seller's Remedies for Buyer's Breach (Money Damages) ………………………… 52 f. Buyer's Remedies for Seller's Breach (Money Damages) ………………………… 55 g. Liquidated Damages………………………………………………………………... 57 I. POLICY CONSIDERATIONS a. What would be the fairest result? b. Commerce thrives with more contracts, and they're more likely to occur if people can trust that they're enforceable c. Courts have moved from a subjective ("meeting of the minds") to objective theory of contract interpretation i. Also moving away from enforcing contracts simply because they were intended to be binding (e.g. nominal consideration, signed and sealed but without sufficient consideration, etc.) d. Society would be harmed if we enforced gifts i. Could make people less likely to be gratuitous out of fear of being sued ii. Not enforced because frankly, they're not as important as contracts with consideration because those are what stimulates the economy, not gifts II. RELEVANT UCC BACKGROUND a. In a non-sale of goods, you can still refer to UCC as guidance (it's just not binding with no sale of goods) b. If a contract is for goods and services, decide what predominates, then apply that law (UCC vs. common law) i. Some courts try to apply one to each part of the contract where it applies c. 1-103: i. (a) the UCC is interpreted liberally to find contracts and thus promote commercial transactions ii. (b): the principals of law and equity supplement the UCC where specific UCC provisions are not on point d. 1-201: General Definitions i. (20) "Good faith" means honesty in fact and the observance of reasonable commercial standards of fair dealing ii. (37) "Signed" includes using any symbol executed or adopted with present intention to adopt or accept a writing e. 1-302: Variation by Agreement (modifying "good faith" standard) i. Parties may, by agreement, determine the standards by which "good faith" will be measured, so long as that standard is reasonable ii. Parties may not disclaim the requirement of good faith by agreement f. 2-104(1): "Merchant" definition i. A "merchant" is someone who deals in goods of a particular kind and/or has knowledge and skill particular to such goods g. 2-105(1): "Goods" definition i. "Goods" means all things which are movable at the time of contracting, other than money, including unborn young of animals and crops 1. Comment 1: Money is a good when traded as a commodity (e.g. foreign currency or a collectable piece of currency), but not when it's simply a medium of payment III. CONSIDERATION a. BACKGROUND i. BASICS 1 1. Bilateral contract: exchanging a promise for a return promise 2. Unilateral contract: exchanging a promise for a performance a. Once performance begins, the offeror must give the offeree reasonable time to complete the performance ii. RESTATEMENT 1. § 71: Requirements of consideration a. (1+2) Performance or return promise must be bargained for (i.e. sought by promisor in exchange for his promise and is given by the promisee in exchange for that promise) b. (3) Performance may consist of: i. (a) An act other than a promise, or ii. (b) A forbearance, or iii. (c) The creation, modification, or destruction of a legal relation c. (4) The performance or return promise may be given to the promisor or to some other person iii. CASE LAW 1. Hamer v. Sidway (1891) a. Facts: Man promised his nephew that if he didn't drink, smoke, swear, or play cards or billiards for money until he was 21, he would pay him $5,000. Nephew abstained until he was 21, at which point he requested the money, but his uncle argued he'd give him the money when he was mature enough to handle it properly. Nephew agreed, but uncle died before ever paying him. b. Rule: (1) In general, the waiver of any legal right at the request of the promisor is sufficient consideration; (2) an equal exchange is not necessary for consideration, it is up to the parties entering the contract to decide the value they put on the promise or performance. i. § 71(3)(c) 2. Langer v. Superior Steel Corp. (1932) a. Facts: Superior Steel Corp offered Langer $100 a month as pension for the rest of his life so long as he isn't employed by a competitor. He remained unemployed, but the company stopped paying him 4 years later. b. Rule: Consideration exists if one refrains from doing something that he has a legal right to do. i. § 71(3)(c) 3. Pennsy Supply, Inc. v. American Ash Recycling (2006) a. Facts: American Ash Recycling supplied Pennsy Supply with allegedly defective paving materials of charge to use in subsequent projects. Plaintiff argues that defendant supplied the materials free of charge to avoid disposal costs. b. Rule: Bargained for consideration exists when the promise induces the detriment and the detriment induces the promise. b. NOMINAL CONSIDERATION AND INTENT TO CONTRACT i. BASICS 1. Nominal consideration is not valid consideration 2 ii. UCC 1. 2-205: Firm Offers a. An offer by a merchant, in writing, that assures it will be held open, will be held open (i.e. not revocable) for the time stated or for a reasonable time if none stated i. 3-months max ii. No consideration necessary iii. CASE LAW 1. In re Greene (1930) a. Facts: Debtor made countless monetary promises to his mistress, including that he would marry her once he divorced his wife. They attempted to prove consideration by her agreeing to give him $1 (unproven if she actually did) and by both of them signing a sealed document. b. Rule: Intent to undertake a legally enforceable commitment is not enough to constitute consideration (mere nominal consideration is not enforceable in today's world) c. Release from "imaginary claims" are not valid consideration c. MIXED MOTIVES AND ADEQUACY i. BASICS 1. Courts will not examine adequacy of consideration (§ 79), EXCEPT in instances of trading money for money because no reasonable person would trade more money for less money (if someone did, it's likely that duress or impaired mental state were present) a. Courts inadvertently do sometimes to determine if consideration is nominal or a contract is unconscionable b. Policy (for instances other than trading money for money): we don't want the government to interfere with the free market ii. RESTATEMENT 1. § 79: Adequacy of consideration is not required iii. CASE LAW 1. Thomas v. Thomas (1842) a. Facts: Husband, on his deathbed, tells witnesses that his wife shall have his house or 100 pounds per year from his estate. His widow later comes to an agreement with him brothers that she will live in the house so long as she pays 1 pound rent per year and sufficiently maintains it. b. Rule: Courts will not assess the adequacy of consideration if there is a legitimate bargain between parties i. § 79 2. Browning v. Johnson (1967) a. Facts: Parties contracted for Johnson to purchase Browning's medical practice. Browning decided he wanted to back out and offered Johnson $40,000 to give up the sale of the practice. Johnson agreed. Browning later brought suit because he felt the second contract was not supported by consideration. 3 b. Rule: In a unilateral contract, sufficient consideration exists when one party incurs a detriment in exchange for the other party's promise (e.g. surrendering a legal right) d. PRE-EXISTING DUTIES AND MODIFICATION i. BASICS 1. Pre-existing duty: a promise to do something you were already going to do and/or have a legal obligation to do a. If pre-existing duty is present, the contract is illusory 2. Doctrine of unanticipated circumstances: if circumstances not anticipated at time of contracting arise, parties may voluntarily increase the amount of compensation due even if no additional consideration is given ii. UCC 1. 2-209: Modification, Rescission, and Waiver a. (1) Consideration is not required for modification [but must be in good faith (comment 2)] b. (2) A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, UNLESS between merchants and signed by the other party c. (3) Statute of Frauds (2-201) must be satisfied if the contract is within its provisions iii. RESTATEMENT 1. § 89: Modification a. A promise modifying a duty under a contract not fully performed on either side is binding: i. (a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; or ii. (b) to the extent provided by statute; or iii. (c) to the extent that justice requires iv. CASE LAW 1. Alaska Packers' v. Domenico (1902) a. Facts: Domenico workers agreed to work for Alaska for $50-60, but when they arrived at the fishing location, they demanded $100. The Alaska superintendent informed them that he did not have the authority to do this, but eventually gave in and agreed to the new terms. Alaska later informed them that they would be paid the amount they originally agreed to. b. Rule: A promise to pay more money for doing something which he is already under contract to do (preexisting duty) is not enforceable for lack of consideration. i. Agency is relevant: superintendent was not an authorized agent of the company, so he could not modify the employment contracts v. Angel v. Murray (1974) 1. Facts: Maher entered into a 5-year contract with the city of Newport for trash collection. The third year of the contract, 400 new dwellings were 4 built, a rapid increase from the 20 to 25 that had been typical in recent years. Maher requested to the city council that they pay him an additional $10,000 for the last two years to compensate him for the additional dwellings. City council approved. 2. Rule: Under the doctrine of unanticipated circumstances, parties to a contract may voluntarily increase the amount of compensation due even if no additional consideration is given. a. § 89 e. DISCRETION AND IMPLIED OBLIGATION i. BASICS 1. Implied obligation of good faith in contracts 2. Satisfaction clause: allows a promisor to refuse to pay the promisee for services performed if he is not subjectively satisfied with the promisee's performance a. Policy: many oppose this as it can dissuade people from entering into a contract, which makes the goal of promoting a mercantile economy more difficult b. 2 categories for satisfaction i. Objective (e.g. your toaster doesn't operate properly as promised) ii. Subjective (e.g. evaluating a painting that you commissioned, because that's the opinion of the person viewing it) c. Our legal system has moved away from Formalism (the tendency to nitpick and invalidate contracts simply because one word is wrong or or a few minor discrepancies are present) and towards examining the purpose and overall intent of the contract (Cardozo in Wood v. Lucy) ii. UCC 1. 2-305: Open Price Term a. (1) Parties can, if they so intend, form a contract without a settle price. In such a case, the price is a reasonable price at time of delivery if… i. (a) nothing is said as to price; or ii. (b) price is left to be agreed by the parties but they fail to agree; iii. (c) price is to be fixed by some agreed market or other standard but that becomes impossible at time of delivery (e.g. market no longer exists) b. (2) Duty of good faith in determining what a reasonable price is c. (3) If a price fails to be fixed through fault of one party, other party can either cancel the contract or fix a reasonable price himself d. (4) If the parties don't intend to be bound unless a price is agreed upon, and no such price is agreed upon, the contract is cancelled and all goods and payments are to be returned 2. UCC § 2-306: Output, Requirements and Exclusive Dealings a. (1) When exact quantity of output or requirements is not specified in the contract, it is expected that, in good faith, the output or requirements be reasonably proportionate to any estimate, or if no 5 estimate, to any normal or otherwise comparable prior output or requirements b. (2) Exclusive agreements impose a requirement for the seller to use best efforts to supply the goods and the buyer to use best efforts to promote their sale c. [Policy: Seeks to promote a mercantile economy] iii. CASE LAW 1. Wood v. Lucy (1917) a. Facts: Defendant was a fashion icon. Plaintiff was to have the exclusive rights (subject to defendant's approval) to place her endorsements on designs, and they would split all the profits. b. Rule: An implied (in fact) promise to use reasonable efforts may be implied from the entire circumstances of a contract c. Good faith can compensate for vagueness of a contract 2. Omni Group, Inc. v. Seattle-First National Bank (1982) a. Facts: Purchase of the property was subject to plaintiff obtaining an engineer's and architect's feasibility report and notifying third party within 15 days of that if they accept the transaction. Third party later argued that requiring the engineer's and architect's report made the contract illusory. b. Rule: A promise that is dependent upon a fulfillment condition (e.g. obtaining a bank loan to buy a house) is not illusory so long as it is still in good faith. f. MORAL OBLIGATION AND PAST CONSIDERATION i. BASICS 1. Ways moral consideration can be valid: a. Revival of a formal obligation (First Hawaiian Bank v. Zukerkorn) b. Underage person coming of age and re-affirming the promise they made when under-aged c. Part payment is made (Webb v. McGowin) d. Received a material benefit and made a subsequent promise to repay (Webb v. McGowin) 2. Past consideration is not valid consideration (§ 86) ii. RESTATEMENT 1. § 86: Promise for Benefit Received a. (1) A promise made in recognition of past consideration is binding to the extent necessary to prevent injustice b. (2) A promise is not binding under (1) if… i. (a) the promisor was not unjustly enriched (e.g. it was a gift) ii. (b) its value is disproportionate to the benefit iii. CASE LAW 1. Mills v. Wyman (1825) a. Facts: Plaintiff's 25-year-old son returned from a voyage to sea, but fell sick among strangers soon after his return. Defendant took him in and cared for him until he died. Plaintiff wrote defendant a letter promising to pay defendant back. He never did. 6

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