Interests in Real Property

Interests in Real Property

1. Real property in general: Interests in real property can be divided into two broad
categories: possessory and non-possessory.

a. Possessory: Possessory interests in real property are called estates, and can be classified
either as freehold estates or leasehold estates.

b. Nonpossessory: Nonpossessory interests in real property include categories such as
easements, profits, and licenses.

Property may be held by one person or by more than one person who jointly hold an
undivided interest in the real property.

2. Freehold estates: Freehold estates are a form of ownership that gives the owner the right to
possess and use the property. There are a number of categories of freehold estates, and they
are categorized according to their potential duration. Some estates can last forever, some
only for the life of the person holding it.

a. Fee estate: These estates give the owner the right to possess and to use the land. There
are a number of categories of fee estates. All have the potential to last forever, but some
fee estates may have conditions that will end the estate if they occur.

1) Fee simple absolute estate: Also referred to as fee simple or just fee the form of
ownership one acquires when one buys real property without any conditions. It is
absolute ownership. The owner can sell it, give it away, take out loans using the land
as collateral, etc. Since this is absolute ownership, the estate can last forever so long
as taxes are paid and the property is maintained.

2) Qualified fee estates: Qualified fee estates are made up of simple determinable, fee
simple subject to a condition subsequent, and fee simple subject to an executory
interest. These estates come with some sort of condition. The estates have the
potential to last forever, but if a condition is violated, the estates can come to an end.
Example: Jones conveys the property known as Greenacres to Miller so long as the
property is not used for gambling purposes. Miller will have this land forever, but if
he should allow gambling to take place (the prohibited condition), the estate will
come to an end.

The owner of the estate has the right to sell or give away the property, but the
condition will transfer to the new owner.

3) Life estates: When a property is given to someone and the duration of the estate is
measured by a person’s life, the estate is called a life estate.

Example: Jones conveys the property known as Blackacres to Baker for her life.
Baker has a life estate. It will last as long as she is alive. Upon her death, the property
will return to Jones or his or her heirs. a) What the life estate owner may do with the land: Baker may use and enjoy the
land, but Baker may not exploit the land. She will have to return the land to the
next owner in much the same condition that she received it. The only exception
to the rule regarding exploitation of the land is if the only use of the estate that is
received is for purposes of exploitation.

Example: If a life estate in a gold mine is given, the life estate holder may mine
for gold.

b) Waste: The life estate holder cannot commit what is known as waste. Waste takes
place when the property is deliberately destroyed (affirmative waste), or not
maintained properly and is allowed to deteriorate (permissive waste), or when the
character of the property is changed (ameliorating waste).

Example: An old mansion is converted into a modern parking lot. Even if the
property is more productive, the character of this land has been changed.

3. Leasehold estates: A lease takes place when possession to a property is transferred from the
landlord to a tenant pursuant to a contract. The statute of frauds requires that the contract be
in writing if the lease is for a period longer than a year. There are different categories of
leases:

a. Tenancy for years: This is a lease for a specific period of time. It can be for a week, a
month, a year, or several years. Since the beginning and the ending date are known, there
is no need to give notice to end this lease.

b. Periodic tenancy: In this tenancy, the lease is for a set period of time (The period may be
for a week or a month, etc) and the lease will continue to renew for a new period until
notice to end the lease is given by the tenant or the landlord. How much notice must be
given usually depends upon the length of each period. In a month-to-month tenancy, a
month’s notice would be required. The maximum required notice is six months.

1) By implication: A periodic tenancy can be created by implication. If a tenant moves
into an apartment without a contract, but gives the landlord a check for $700 each
month, most courts would find a periodic tenancy with the period being one month.

c. Tenancy at will: This is a lease that can be terminated at anytime by either the tenant or
the landlord. Because of this feature, this type of lease was usually limited to tenants and
landlords who have a trusting relationship such as leases between family members.

d. Tenancy at sufferance: This is a tenancy that is created when a tenant refuses to vacate a
property after the end of a lease.

4. The right of landlords and tenants to transfer their property interests: The landlord can
sell or give away his or her property to another even if the property is leased. The new owner
will acquire the land with the existing lease and must honor the terms of the lease. A tenant
may transfer his or her lease by making a sub-lease or an assignment.

a. Assignment: An assignment takes place when a tenant transfers all of his or her rights
under the lease to another tenant.

Example: Jones signed a two-year lease for an apartment. After four months, Jones
assigns the lease to Davis and moves out. Jones has made an assignment. Even though Jones is no longer a tenant, Jones is still liable for the lease payments to the landlord if
Davis is unable to make the payment.

b. Sublease: A sublease takes place when the tenant transfers a part of the lease to another
person.

Example: Jones signs a two-year lease for a three bedroom apartment. She rents one of
the bedrooms to Buckley. Jones has made a sublease. In the case of a sublease, only
Jones is responsible to the landlord for the lease payments. Buckley is not in a contractual
relationship with the landlord.

5. Obligations of landlords and tenants with regard to the rental agreement:

a. Obligations of the tenant: The tenant’s primary obligation is to make the lease
payments, and to use the property in a reasonable manner. The tenant is not liable for
normal wear and tear or for damages that are not the fault of the tenant. The parties to a
lease can modify the agreement and impose additional terms.

1) Eviction: A tenant can be evicted for breaching a leave lease covenant. If a tenant is
evicted, the obligation to pay the lease comes to an end. A lease with a survival
clause, would obligate the tenant to pay the difference between the payment the
tenant was making and the payment the landlord is able to receive from a new tenant.

2) Abandonment: If the tenant abandons the property before the lease ends, the tenant’s
obligation to make the lease payment ends if the landlord reenters the property. If a
survival clause is in place, the landlord may enter and still hold the tenant liable for
the lease payment.

b. The landlord’s responsibility: The landlord has the responsibility to make sure the
tenant is able to occupy and enjoy the property. These rights are called the right to quiet
enjoyment of the property. A part of the landlord’s obligation is to make sure the
premises are safe and are in conformity with local housing codes.

1) Fitness for use: Where residential units are concerned, most courts have found an
implied warranty of habitability in all leases. If the rental unit does not conform to the
housing codes, the landlord has violated this warranty.

2) Eviction: Quite obviously, if the tenants are unlawfully evicted by the landlord, their
right to quiet enjoyment would have been violated. In some cases, a tenant may be
deemed to have been evicted without being formally evicted.

Example: If the property is in such disrepair that a reasonable person would no
longer use the property and the landlord has refused to make the necessary repairs,
the tenant may leave and sue the landlord under a theory of constructive eviction.

3) Duty to make repairs: The landlord is responsible for making repairs to the common
areas of the rental unit. This would include areas such as the garage, roof, lobby, etc.
In addition, the landlord must make sure that the rental unit, before it is turned over to
the tenant, is in a safe condition, and basic repairs have been made. Basic repairs refer
to things such as a working heater, running water, functioning toilet, etc.

6. Concurrent Ownership: A property may be held by one person or more people. When two
or more people jointly own property, they are co-tenants. Each is entitled to an undivided half interest in the entire property. Neither has a claim to a specific portion of the property.
There are several forms of joint ownership of property.

a. Tenancy in common: This is the most common form of joint ownership. Each joint
owner has a co-interest in an undivided half of the property. Each is free to sell his or her
portion of the property at anytime. Upon the death of one joint owner, his or her interest
will be disposed according to the terms of the person’s will.

b. Joint tenancy: The ownership feature is the same as in tenancy in common. What is
special about joint tenancy is the right of survivorship. When one joint owner dies, the
surviving joint owner automatically becomes the owner of the entire property.

c. Tenancy by the Entireties: Similar to joint tenancy, tenancy by the entireties can only
be acquired by married couples.

2. Future interests: A future interest is a property right that will become possessory at some
point in the future.

Example: Jones conveys the property known as Blackacres to Baker for her life then to
Davis in fee simple absolute.

Davis will receive full ownership of Blackacres when Baker dies. Davis has a future interest.
Future interests can be classified into the following categories:

a. Reversion: This is the future interest that is retained by the owner of a property when he
or she gives a lesser interest in the property to another person.

Example: Jones conveys a property to Baker for her life. Baker has a life estate. When
Baker dies, the property will come back to Jones. Jones has a reversion.

b. Possibility of a reverter: Possibility of reverter is the future interest that is held by the
grantor of a property when a fee simple determinable is given. If the condition that
attaches to this estate is violated, the property will be returned to the grantor.

Example: Jones gives his land to Thomas so long as the land is not used for gambling.
Thomas has a Fee simple determinable. If gambling takes place on the property three
years later, the property comes back to Jones. Jones has a future interest called a
possibility of reverter.

c. Remainder: A remainder is a future interest that is created in someone other than the
grantor when a lesser property that is conveyed to another person comes to a natural end.
Example: Jones conveys to Baker a life estate in Greenacres with a remainder to
Williams in fee simple. Williams has a remainder.

1) Requirements for a remainder:

a) Created in a third person, not the grantor: The future interest is held by a third
party (Williams), not the grantor (Jones).

b) At the natural expiration of the prior lesser estate: The prior estate must come
to a natural end. In the above case, the prior estate, a life estate, comes to a natural
end when Baker dies. c) Same conveyance (document): The prior estate and the remainder estate must be
created in the same document. In the above example, the life estate (to Baker) and
the remainder (to Williams) were both created in the same document.

(1) Vested remainder: In a vested remainder, the person who holds the
remainder is known when the remainder was created.
Example: in the above example, we know that Williams will receive the
remainder. Her interest is vested.

(2) Contingent remainder: In a contingent remainder, the exact person who will
get the remainder has not been determined.

Example: Jones conveys a life estate to Baker with the remainder to the first
born girl of Betty Smith in fee simple. At the time of the conveyance Smith
does not have a little girl. The remainder is contingent. When a little girl is
born to Smith, the remainder will change into a vested remainder.

3. Nonpossessory Interest in Real Property: Nonpossessory interest in land allows the holder
of the interest to go on to the land and use the land or take something from the land, but not
possess the land.

a. Easement: An easement gives the holder the right to use the land of another person for a
specific purpose.

Example: Holders of easements may have the right to cross over another person’s
property, to lay a power or telephone line over another person’s property, etc.

1) Dominant and servient estates: Suppose that Jones, owner of Greenacres, gives
James, the owner of Blackacres, the right to cross over Greenacres. Blackacres is
considered the dominant estate because the owner of Blackacres is helped by this
easement. Greenacres is the servient estate because it is burdened by the easement.

2) Easement appurtenant and easement in gross: Easements appurtenant are
easements that attach to the land. In the above example, the right of the owner of
Blackacres to walk across a portion of Greenacres attaches to Blackacres. If James,
the current owner of Blackacres, sells the land to someone else, that person also will
have the right to walk across Greenacres. In some cases, the easement does not attach
to a specific land. It is, instead, held by a person or a company.
Example: PGE has an easement to run a power line over Whiteacres. This easement
is held by PGE and the benefits of this easement do not attach to any property.

3) Creation of easements:

a) Express grant: Two parties formally negotiate and create an easement.

b) Necessity: An owner of a property divides her property into two parts and sells
the back lot. The owner of the back lot does not have access to a road, the lot is
landlocked. Most courts would give the owner of the back lot an easement of
passage over the front half of the property in order to make the back lot useable.

c) Prescription or adverse possession: If certain conditions are met, a person could
acquire an easement which is adverse to the interest of the property owner simply
by using a portion of someone else’s land.

b. Profits:

c. License:

Sample Questions #3

1. A statute requires all vessels traveling on the Great Lakes to provide lifeboats.  One of Winston Steamship Company’s boats is sent out of port without a lifeboat.  Perry, a sailor, falls overboard in a storm so heavy that had there been a lifeboat it could not have been launched.  Perry drowns.  Is Winston liable to Perry’s estate?  Please discuss. 
2. Escola, a waitress, was injured when a bottle of Coca-Cola exploded in her hand while she was putting it into the restaurant’s cooler.  The bottle came from a shipment that had remained under the counter for thirty-six hours, after being delivered by the bottling company.  The bottler had subjected the bottle to the method of testing for defects commonly used in the industry, and there is no evidence that Escola or anyone else did anything to damage the bottle between its delivery and the explosion.  Escola brought an action against the bottler for damages.  Because she is unable to show any specific acts of negligence on its part, she seeks to rely on the doctrine of res ipsa loquitur.  Should she be able to recover on this theory?  Please explain.
3. Nathan is run over by a car and left lying in the street.  Sam, seeing Nathan’s helpless state, places him in his car for the purpose of taking him to the hospital. Sam drives negligently into a ditch, causing additional injury to Nathan.  Is Sam liable to Nathan?  Please discuss.

ANSWERS:

Question 1.  The fact situation tells us that there is a law which requires all vessels sailing on the Great Lakes to have lifeboats on board.  This law defines one of the duties boats sailing on the Great Lakes must follow.  This duty was breached when one of Winston Steamship Company’s ships set sail without the required lifeboats.   This breach of duty was not, however, the cause of Perry’s death.  This is because the fact situation tells us that life boats simply could not have been launched due to the severity of the storm.  Even if the ship carried lifeboats, it would not have made a difference.  Lacking the required causation, there is no liability.

Question 2. Res ipsa loquitur is a technique which can be used by a plaintiff to create an inference of negligent behavior in situations where it is difficult to explain how something took place.  In order for Escola to use this technique, she must be able to demonstrate three things:

• Negligence required.  The accident which took place could not have taken place in the absence of negligence.  This element is satisfied because a bottle of Coca Cola should never have exploded simply by the act of moving it from one location in the restaurant to the refrigerator.  The bottle could only have exploded due to negligence in the construction of the bottle, negligence in placing the Coca Cola within the bottle, negligence in the formulation of the Coca Cola, etc. 

• The plaintiff most likely is responsible for the negligence.  This element is satisfied because the fact situation tells us that the defendant, Coca Cola Co. created the soft drink, filled and capped the bottle, and delivered it.  It may also have been responsible for making the bottle as well.  This degree of control by the defendant shows that the act of negligence must have taken place while the bottle was under the defendant’s supervision and control.  (some of the students were misled by the fact that industry standards were observed in the manufacture of the bottles, and concluded that negligence may not have taken place.  This may simply be a case where the industry standard was insufficient or applied incorrectly.)   

• The defendant did not contribute to her injury.  This element is satisfied because the fact situation tells us the bottles were stored under the counter, and the only thing Escola did was to transfer the bottle from the place of storage to the refrigerator. What she did could not have contributed to the bottle exploding.

Conclusion:  All three elements necessary to use res ipsa loquitur have been shown.

Question 3.  The fact situation for this question does not indicate any type of relationship between Sam and Nathan which would require Sam to come to Nathan’s aid.  But once Sam made the decision to help Nathan, he was under a legal duty to act in a reasonable manner.  The fact situation indicated that Sam drove in a negligent manner while he was taking Nathan to the hospital, and this resulted in an accident which caused further injury to Nathan.  The act of driving in a negligent manner breached Sam’s duty, and this was the cause of Nathan’s additional injury.  When someone drives in a negligent manner, it is entirely foreseeable that an accident in which others might be injured could take place.  There is, therefore, proximate cause to hold Sam responsible.

Negligence and Strict Liability

Negligence and Strict Liability 

1. The structure of tort remains the same whether the tort is committed intentionally or through
an act of negligence. In both cases, it must be shown that there was a duty, the duty to act
reasonably was violated, this violation caused the injury, and there was proximate cause.

a. Negligence defined: An act is negligent if it falls below the standard established by law
for the protection of others. This is another way of saying that if a person created, by his
or her behavior, a situation with potential for causing unreasonably high risk of harm, and
if someone is injured as a result, liability will follow. In determining whether a behavior
was unreasonable or not, the following factors would be examined in light of the
circumstances:

1) The probability that the harm would take place
2) The seriousness of the harm
3) The social usefulness of the conduct that created the risk
4) The cost of any precautionary measures that could have reduced the level of risk

f. The Reasonable Person Test: A good shorthand to decide whether a person’s conduct
was reasonable or not is to use the “reasonable person” test. In using this test, we ask how
a person who is both reasonable and prudent would have acted in the same situation.

1) Children: Children must also act prudently and reasonably keeping in mind his or her
age and knowledge. But when a child engages in adult activities such as operating a
car, in many states, he or she is held to the same standard as an adult.

2) People with disabilities: If a person has a disability, he or she is expected to act as a
reasonable person with that disability.

3) Superior skill: A person with specialized knowledge, such as attorneys, doctors,
accountants, carpenters, and pilots are expected to behave in a way that reasonable
persons with the specialized knowledge would behave.

4) Mental deficiency: A person with a mental deficiency is expected to behave in the
same reasonable manner that would be expected from a person without the mental
disability.

5) Emergency situation: The fact that an emergency situation may exist does not
change the standard. A person is expected to act in a reasonable manner in light of the
emergency.

g. Legal requirement and the reasonable person test: In some instances, the law will
define the conduct that is expected.

1) Where the law defines the conduct that is expected, if the conduct causing the injury
fell short of what was required by law, most court would find that the conduct was
negligence per se.

Example: a law requires that employers issue hard hats to every worker at a
construction site. A hard hat was not issued to David, who was hired today to work at
the site, and to Sally, a city inspector, who came to check on the construction. Both
were hurt by falling debris. In a lawsuit, David would not have to prove that the
employer was negligent. The fact that the law requiring all employees to have hard
hats was violated would automatically show that the employer’s behavior was
negligent. Sally, since she was not an employee, would not be covered by the law.
She would have to prove that the act of not issuing a hard hat was unreasonable
behavior and hence negligent.

2) Complying with the law is not enough: If a law defines how a person should behave
in a given situation, that law sets only the minimum standard. Depending upon the
circumstances, just obeying the law may not be enough.

Example: Even though the posted speed limit is 65 mph, driving 65 mph in a severe
rainstorm that reduced visibility would not be reasonable. The reasonable person test
would require the driver to drive at a speed that would be safe under the
circumstances.

h. Duty to act: This is the first step in the analysis of a tort case. If there is no legal duty to
act, the analysis need proceed no further. Please remember that there is a difference
between a legal duty and moral duty to act.

1) Duty of a landowner: A property owner must use the property in a reasonable
manner. He or she cannot use the land in a way that might cause harm to others.

2) Degree of care of landowners: The degree of care the landowner must exercise
towards visitors on the land depends upon their classification with respect to the land.

a) Duty to trespassers: A trespasser is someone who enters another’s property
without permission. Generally, the landowner is not responsible for the safety of
trespassers, but many courts require that once a landowner is aware of the
presence of the trespasser (or knows that people enter his or her property on a
regular basis) there is a duty to make sure the property is safe.

b) Duty to licensees: A licensee is a member of the family, a guest, an uninvited
salesperson, etc. They are on the property with the consent of the owner. The
property owner has a duty to warn licensees of dangerous activities and conditions
that may not be apparent.

Example: Jason was invited to a large country estate for dinner. The dirt road,
which appeared to be solid, can become quite slippery when it is wet. During the
dinner, there is a short but violent downpour. The owner of the property has a
duty to warn Jason that the road may now be hazardous.

(1) A licensee may become a trespasser: A licensee can become a trespasser if
he or she exceeds the scope of the permission that allowed him or her to come
onto the land. A person who is permitted to come onto the property to sell
encyclopedia exceeds the scope of his or her permission if he or she wanders
onto parts of the property that is not required in order for the sale to be made.

c) Duty to invitees: An invitee is a member of the public who is invited onto the
land for the purpose for which the land is open to the public (park, beach,
swimming pool) or a person who is invited onto the land to conduct business
(shoppers at a store, repair person coming to make repairs, etc.). The landowner is
responsible for protecting the invitee against dangerous conditions they are
unlikely to spot. This responsibility extends not only for dangerous conditions that
he or she is aware of, but also conditions that he or she should have known about.

i. Causation in fact: This is a requirement that the person’s breach of the duty of
reasonable care was the actual cause of the injury or damage. If the injury or damage
would have been caused no matter how careful the person was, liability would not result
unless this was a special case to which the concept of strict liability applies.

1) Substantial factor test: If two people, acting independently, cause damage or harm
in a situation where the act of just one of the persons would have been enough to
cause the harm or damage, both parties are liable.

Example: Two hunters, shooting their shotguns at a deer, shoot an innocent
bystander. In this case, both were substantial cause of the injury and both are liable
even though the act of one person alone would have been enough.

j. Proximate cause: This is a social policy issue. Not every event that flows from a
negligent act results in liability. In general, courts will limit liability to those damaging
acts that are foreseeable.

1) Unforeseeable consequences: The reason the law does not want to impose liability
for injuries that are not foreseeable is because there is nothing that a reasonable
person could have done to prevent the damage. If the damage was unforeseeable, how
would a person have guarded against the consequences?

2) Superseding causes: A superseding cause is a force that comes into play after the
negligent act and which, either together with the negligent act or independently,
causes the damage or harm or aggravates the damage or harm.

Example: Adrian, driving negligently, hits Bill and injures his leg. Bill is taken to a
hospital where he is operated in a negligent manner and dies. Is Adrian liable? The solution depends upon how foreseeable the resulting harm to Bill was. Adrian’s act
caused Bill to be placed in the hospital where he required an operation. When patients
undergo an operation, does medical malpractice occur from time to time? The answer
is yes. Therefore Adrian—and the doctor—would be liable.

See the case of Petition of Kinsman Transit Co.
See the case of Palsgraf v. Long Island Railroad Co.

7. Defenses to negligence:

a. Contributory negligence: If the injured person’s own behavior contributed to the injury,
he or she cannot recover. This doctrine is recognized in only a few states.

1) Last clear chance: In order to ameliorate the harshness of the contributory
negligence rule, the last clear chance rule was developed. Even though the plaintiff’s
behavior fell below that of a reasonable person, if the defendant had the last
opportunity to prevent the harm or injury, the plaintiff would be able to sue.

b. Comparative negligence: If the plaintiff’s action contributed to his or her harm, under
this theory, the degree of fault on the part of the plaintiff and the defendant are measured.
Example: John was driving negligently when he hit and injured Stewart who was
crossing the street against a red light. Stewart suffers $100,000 of injuries. If it is
determined at the trial that Stewart was 25% responsible for the injury and John was 75%
responsible, Stewart would recover $75,000.

1) Limit on comparative negligence: In most states, if the plaintiff’s behavior
contributed 50% or more to the injury, he or she would not be able to recover. If in
the above example, Stewart was 60% responsible for the injury and John was 40%
responsible, Stewart would not be able to recover anything in most states. In some
states, he could recover $40,000.

c. Assumption of risk: This is a case where a person knowingly and voluntarily assumes
the risk of injury.

Example: A professional prize fighter assumes the risks that he may suffer serious injury
when he enters the ring to fight.

8. Strict liability: In a limited number of cases, the law will hold a defendant responsible for
injuries to others even though the person did everything possible to prevent the injuries from
taking place. This is an example of strict liability. It is often called absolute liability or
liability without fault. The rationale is that the activities engaged in by the defendant are such
that society will hold the defendant liable for all injuries proximately caused by the activities.

Strict liability applies in the following situations:

a. Abnormally dangerous activities: Strict liability is imposed in cases where a person
engages in activities that are abnormally dangerous. Abnormally dangerous activities are
activities that are unusual, involve a high risk of serious harm, and the harm cannot be
eliminated by exercise of reasonable care.

Examples:

1) Storing explosives and flammable liquids in large quantities
2) Blasting and pile driving activities
3) Emitting natural gas in a populated area

On the other hand, courts have not found strict liability in cases where the land is used in
a manner consistent with the surrounding area. Examples include:

1) Drilling for oil in an established oil field

2) Transmitting natural gas through pipes

b) Keeping of wild animals: People who keep wild animals are responsible for harm and
injuries caused by the animals.

1) Trespassing animals: When animals trespass upon someone else’s property and
cause damage, the owner is subject to strict liability. There are three exceptions:

(a) Dogs and cats: Owners of dogs and cats are liable for damages caused by their
trespassing pets only if negligence can be shown.

(b) Keepers of animals that stray from highways where they are being
transported are not liable unless negligence is shown.

(c) Farm animals: In certain parts of the country, owners of freely grazing animals
are not liable for damage to a neighboring property unless negligence is shown.

2) Non-trespassing animals: Owners of wild animals are strictly liable for harm
caused by such animals. Examples of wild animals are: bears, lions, elephants,
monkeys, deer, raccoons, etc.

(a) Domestic animals defined: Domesticated animals are animals that are
traditionally devoted to the service of mankind and are considered to be safe.

Examples are dogs, cats, horses, cattle, etc.

Owners of domestic animals are liable for harm and injury caused by these
animals if they knew or should have known of the animal’s dangerous propensity.
The harm must result from the animal’s dangerous propensity.

Example: We expect that a dog will bite another dog or a person, but strict
liability will not result from that. A propensity to bite among dogs is not regarded
as a dangerous propensity. On the other hand if the owner of a 150-pound
sheepdog knows that the dog has a tendency to jump playfully on others, an injury
caused by the dog jumping on another person would be a case where strict
liability would apply.

c) Products liability: Manufacturers of products that result in injury to the users and others
may be strictly liable.

d) Defenses to strict liability: Because of the nature of strict liability, there are very few
defenses. In some cases of products liability, a limited comparative negligence defense
may be permitted. Voluntary assumption of risk may also apply in certain cases.

Example: A person knowingly and voluntarily parks his car in an area where explosives
are being discharged. If his car is damaged by flying debris, he may be precluded from
filing suit.

Intentional Torts

Intentional Torts

1. Purpose of tort law: Tort law is designed to provide relief from acts of civil wrongs or
injuries to their person, property, economic, and other interests.

2. Intent of tort law: The intent of tort law is to accomplish the following:

1) Compensation: Compensate people who sustained harm or loss as a result of someone
else’s conduct.

1) Punitive damages: While the primary purpose of tort law is to compensate, not
punish the wrongdoer, in cases where the behavior that caused the injury were
outrageous, courts will assess punitive damages as a form of punishment. The intent
of assessing punitive damages is to discourage similar outrageous behavior.

2) Allocation of fault: To make sure the person who was responsible for causing the harm
be responsible for making the compensation.

3) Prevent future harm:

3. Connection between tort law and criminal law: In many cases, when a tort law is violated,
a criminal law is violated as well.

Example: Unprovoked, Henry strikes Bill in the face, damaging Bill’s tooth. Bill will be
able to sue Henry for compensation necessary to repair his damaged tooth and for the general
damages he suffered. Henry may also be prosecuted by the District Attorney’s office for
violating the criminal law of battery.

4. Structure of tort law: A plaintiff who is suing for compensation must show the following:

1) Duty: The defendant was under a duty to behave in a certain way.

Example: We all have a duty to drive our cars in a manner that is safe.

2) Breach of duty: The duty was breached in some way. In the case of someone who is
operating a car, the duty to drive safely would be breached if the driver drove under the
influence of drugs or alcohol or disregarded the applicable traffic laws.

3) Causation: The breach of the duty was the cause of the injury. A driver was driving
under the influence of alcohol, lost control of his car, and hit a pedestrian. The driver’s
breach of the duty to drive safely was the cause of the injury.

4) Proximate Cause: The breach of the duty must also be the proximate cause of the injury.
Proximate cause is a public policy issue. Once we determine that a person’s action or lack
of action caused injury to someone, we then ask whether the person should be held
responsible. In some cases, injury may result in a way that could not have been
anticipated. If it could not have been anticipated, steps designed to prevent the injury
could not have been taken. In these cases, should we still hold the person responsible?
This is the issue proximate cause is designed to answer.

5) Damages:

5. Ways in which a tort may be committed: a. Intentionally: A person deliberately breaches a duty and thereby causes harm. Intent, in  the case of tort, refers not to evil or hostile motives. It simply means that the person acted  in order to bring about a certain result or knew or should have known that certain result
would occur by his or her act.

b. Negligently: Where a person’s conduct falls below that of a reasonable person.

c. Strict liability: In certain cases, causation and liability are automatic when a prohibited
event takes place.

6. Scope of tort law: Tort law is designed to provide relief for injury to a person’s physical and
mental well being, business interests, interest in his or her reputation, etc. The following
categories illustrate the wide scope of tort law.

a. Harm to the person: Tort law is designed to provide relief for physical harm, harm to a
person’s feelings, etc. Following are examples of tort laws that are designed to protect a
person’s physical and mental well being.

1) Battery: This is the tort of offensive and unpermitted bodily contact. It may be a
blow to a person’s head or an act as simple as knocking someone’s hat off of his or
her head.

2) Assault: This is an act that places someone in immediate fear of being hit. It is a tort
that falls just short of being a battery.

3) False imprisonment: This is an act whereby a person confines a person against his or
her will. It can be caused by the actual use of force or the threat of force.

a) Detaining shoplifters: Merchants who detain shoplifting suspects who turn out to
be innocent may be charged with false imprisonment. Many states have laws
designed to protect merchants by making exceptions in cases where the detention
is based upon probable cause and for a reasonable period of time.

4) Intentional infliction of emotional distress: This is an act where severe emotional
distress is inflicted upon a person by means of an extreme or outrageous conduct. The
conduct may be caused by an intentional or negligent act. This tort does not apply to
the use of abusive language or to cases of rudeness by one worker to another. A case
of sexual abuse by one worker to another would constitute this tort.

b. Harm to a person’s reputation and interest in privacy:

1) Defamation of character: This is an act in which a false statement is made about a
person to a third party that damages the person’s reputation. If the false statement is
made directly to the person the statement is designed to injury, his or her reputation
would not have been harmed. The false statement must be made to a third party.

a) Slander: Cases where the false information is communicated verbally.

b) Libel: Cases where the false information is communicated through more
permanent means such as writing, video tape, sound recording, etc.

c) Defenses:

(1) Absolute privilege: In some cases, our society has determined that the
interests of society would be furthered by allowing statements, whether true or
not, to be made without fear of lawsuits for slander or libel.

Examples of these situations include: testimony in a court of law, statements
made by the President of the United States or cabinet level members of the
Executive branch of government, statements made in committee or from the
floor of the legislature by the members of the legislative branch, a statement
made by one spouse to another.

(2) Conditional privilege: A conditional privilege allows false statements to be
published without legal consequences in certain cases.

Example: If Thomas, a celebrity, makes a slanderous statement, this
statement is considered to be newsworthy, and a newspaper reporter may
report what Thomas said. In repeating Thomas’s statement, the newspaper
cannot be charged with slander.

2) Invasion of privacy: There are four separate torts in this category. They are all
designed to protect a person’s right to privacy or to protect a person’s property
interest in his or her name.

a) Appropriation
b) Intrusion
c) Public disclosure of a private fact
d) Invasion of privacy

c. Harm to a person’s right to be free from abusive law suits: Three separate torts make
up this category. These torts are designed to prevent an individual from using the legal
process—lawsuits—for an improper purpose.

1) Malicious prosecution
2) Abuse of legal process
3) Wrongful civil proceedings

d. Harm to a person’s property:

1) Trespass: This is the act of entering someone else’s property without his or her
permission. This tort is designed to protect a person’s right to exclusive use or his or
her property.

2) Nuisance: This is the act of interfering with someone’s quiet use and enjoyment of
his or her land.

Examples: Playing music so loudly that it interferes with someone’s use of his or her
land, polluting a stream, causing noxious odors and gas to be emitted.

3) Trespass to personal property: This is the act of unauthorized use or dispossession
of someone else’s personal property.

4) Conversion: This is the act of exercising such control over someone else’s personal
property in such a way that full compensation for the value of the property should be
made.

Example: Mary entrusts her car to a car dealer for the purpose of selling it. The staff
of the car dealership uses the car for personal business and places 8,000 miles on the
car.

e. Harm to business interests:

1) Interference with contract: This is an act that interferes with the performance of an
existing contract.

2) Fraudulent misrepresentation: This is an act whereby a false representation is made
in order to induce certain steps in reliance on the false statement.

Example: A land dealer states that property he is trying to sell will increase in value
because a new shopping mall is scheduled to be built next to his lot. In reliance upon
this statement, a buyer buys his lot. A shopping mall is not scheduled to be built.

Sample Quiz

True or False. The principle of precedent gives stability to
our system of justice.

Answer: True.


True or False: The decisions of the US Court of Appeals are
binding as precedent on other federal district courts except
for the US Supreme Court.

Answer: False. The decision of a US Court of Appeals act as
precedent only upon other federal courts within the jurisdiction
of the particular US Court of Appeals.


True or False. Zack slips and falls while shopping at Safeway.
His medical bill is in excess of $9,000. Zack can sue in a
California small claims court.

Answer: True. If Zack does win, he will only recover the
amount the small claims court is authorized to give. That
amount may be below $9,000.


True or False. Quasi contract is another name for an oral
contract.

Answer: False. Quasi contracts are fictional contracts imposed
by law out of a sense of fairness and to prevent unjust
enrichment


True or False. Law and morals are the same.

Answer: False.
 True or False. In selling his car to James, Mark said that the
car got 45 miles per gallon even though the car only got 25
miles to the gallon. James did not hear the claim about the
mileage and bought the car. When James found that the car only
got 25 miles to the gallon, he can void the contract on the
grounds of fraudulent misrepresentation.

Answer: False. Even though Mark’s statement was not true, James
did not hear it and did not rely upon the false statement in
making his decision to purchase the car.


True or False. Emily gives emergency care to Fred’s adult
daughter when the daughter became ill. Later, Fred promises to
pay Emily for the money she spent caring for his daughter.
Fred’s sincere promise is binding.

Answer: False. Fred’s promise is compensate Emily for
something Emily has already done. Past performance cannot act
as the legal consideration necessary to make Fred’s promise
enforceable.


True or False. In order to convince a car dealer to sell a car
on credit to her 17 year old son, Mary promises that she will
pay the monthly payment if her son doesn’t. This promise must
be in writing.

Answer: True. The Statute of Frauds require that promises to
be responsible for someone else’ debt must be in writing in
order to be enforceable.


True or False. Al owns a farm that he believes is worth
$100,000. Betty knows that there is oil under the farm and
offers Al $125,000 for it. Al accepts and sells the farm. Al
later realizes that the land was worth more than $250,000. Al
can have the contract avoided based upon fraud.

Answer: False. Betty was under no obligation to disclose the
information she had regarding the true value of the farm to Al.


True or False. A judge deciding a common law case must look at
what happened in similar cases in the past for guidance.

Answer: True. True or False. Peter offered to wax Kathy’s car for $20. Kathy
accepted on the condition that he would clean the upholstery
too. They have a contract.

Answer: False. Kathy, in her acceptance, added terms that were
not a part of the original offer she received. She has made a
counter offer, not a valid acceptance. There is no contract.


True or False. Sally goes away to college at 17, lives on her
own and pays her own rent and electric bills. If she makes a
contract to buy a television set, in most jurisdictions, she may
assert her minority status and set aside the contract.

Answer: True. Sally is still a minor, and has the right to
disaffirm contracts she may have created.


True or False. An incidental beneficiary has no right to enforce
a contract.

Answer: True. An incidental beneficiary is not a party to a
contract.


True or False. Just about any case can be appealed to the U.S.
Supreme Court.

Answer: False. Only cases dealing with federal issues may be
appealed to the US Supreme Court.


True or False. A contract to sell a $500,000 life insurance is
governed by the UCC.

Answer: False. The UCC governs sales of personal property.
Insurance is not, for the purpose of the UCC, considered to be
personal property.


True or False. A contract is not valid if all of the terms are
not clearly stated.

Answer: False. Modern courts will accept contracts with
missing terms so long as the courts are convinced the parties to
the contract entered into a valid contract.

True or False. On June 1, a club made an offer to pay $300 to a
liquor store in order to have ten kegs of beer delivered to the
city park for a July 4th fund raising event. On June 30, the
city passed a law prohibiting consumption of alcohol in the city
park. The club’s offer terminated on June 30.

Answer: True. The contract offer became illegal on June 30 and
was terminated.


True or False. The only purpose of law is to define what
conduct constitutes a crime.

Answer: False. One of the primary purposes of law is to
regulate behavior of the people. This involves more than merely
stating what actions are a crime.


Multiple choice. Henry gives Al $50 in return for Al’s promise
to threaten violence against Sara. Henry hopes that Sara will
come to him for help. Sara never comes for help, and Henry
found that Al went drinking with the $50.

a. Henry can get the $50 back from Al.
b. Henry can get the $50 back and force Al to do what he
promised.
c. Henry can neither get the $50 back nor force Al to act.
d. Henry can force Al to act, but Al may keep the $50.

Answer: C. Henry entered into a contract for an illegal act.
He can neither enforce the agreement nor sue to retrieve the $50
payment.


Multiple choice. Which is not a discovery device.

a. Interrogatories
b. Depositions
c. Request for medical records
d. Counterclaims
e. Admissions

Answer: D.

 Multiple choice. Susan writes a letter to Fred offering to sell
her farm for $200,000. After mailing the letter, Susan learns
that the farm is worth $300,000 and changes her mind about
selling.

a. Susan has made a firm offer which cannot be revoked.
b. Susan can revoke her offer at anytime.
c. Susan must keep the offer open because this is now an
option contract.
d. Susan is promissorily estopped from revoking her offer.

Answer: B. Generally, an offer may be revoked at anytime
before it is accepted. The fact situation does not indicate
that Fred has accepted, and the offer is neither an option
contract nor one where detrimental reliance would apply.


Multiple choice. Which of the following would be considered to
be a misrepresentation of a material fact for purposes of
establishing fraud in the inducement.

a. This is the best car in town for the money.
b. This style of jacket is going to be the most popular
style next year.
c. This car has a new radiator.
d. In my opinion, this is the best buy for the money.

Answer: C. All the other answers are expressions of opinions.
Answer C is the only factual answer in the group. Either the
car has a new radiator or it does not.


True or False. For a misrepresentation to be actionable as
fraud in the inducement, it must be a misrepresentation of
opinion.

Answer: False. In most cases of fraud, a factual error must be
made. An opinion is just that, an opinion. In special cases,
an expression of opinion can be treated as factual. If an art
expert says, this painting is a genuine Picasso, it better be.


True or False. A contract to pay for lawn care services costing
$1,500 must be in writing in order to be enforceable.

Answer: False. This is a contract for service. The Statute of
Frauds does not apply. Multiple choice. Bill bets his friend Al $100 that the Vikings
will win the next Super bowl.

a. This is an unconscionable contract.
b. This is an illegal agreement.
c. This agreement obstructs justice and is illegal.
d. This is an illegal restraint of trade.

Answer: B.


Multiple choice. Carl and Ron are contractors. They know that
several jobs are going to be up for public bid, and agree that
Carl will bid on one and Ron will bid on the other. When the
bids are opened, Ron has bid on both jobs and received both.
Carl now wants to sue Ron for breach of contracts.

a. Carl has detrimentally relied upon Ron’s promise that
he would not bid on both jobs, and will win.
b. Since Carl is less at fault than Ron, he will win.
c. This agreement is against public policy, and will not
be enforced.
d. Both parties agreed to this deal in good faith. Carl
will win.

Answer: C.


True or False. Specific performance is available as a remedy in
most cases of breach of contracts.

Answer: False. Specific performance as a remedy is only
available in situations where ordinary damages are not
sufficient to compensate the injured party.

Sample Questions #2

1. Justin owned three speedboats named Porpoise, Prudence and Providence. On April 2, Justin made written offers to sell one of the three boats in the order named for $4,200 each to Charles, Diane, and Edward respectively, allowing ten days for acceptance. In which, if any, of the following three situations was a contract formed? Please explain.

a. Five days later, Charles received notice from Justin that he had contracted to sell Porpoise to Mark. The next day, April 8, Charles notified Justin that he accepted Justin’s offer.

b. On the third day, April 5, Diane mailed a rejection to Justin that reached Justin on the morning of the fifth day. At 10 A.M. on the fourth day, Diane sent an acceptance by telegram to Justin, who received it at noon the same day.

c. Edward, on April 3, replied that he was interested in buying Providence but declared the price appeared slightly excessive and wondered if, perhaps, Justin would be willing to sell the boat for $3,900. Five days later, having received no reply from Justin, Edward accepted Justin’s offer by letter and enclosed a certified check for $4,200.

2. On April 8, Crystal received a telephone call from Akers, a truck dealer, who told Crystal that a new model truck in which Crystal was interested would arrive in one week. Although Akers initially wanted $10,500, the conversation ended after Akers agreed to sell and Crystal agreed to purchase the truck for $10,000, with a $1,000 down payment and the balance on delivery. The next day, Crystal sent Akers a check for $1,000, which Akers promptly cashed. One week later, when Crystal called Akers and inquired about the truck, Akers informed Crystal he had several prospects looking at the truck and would not sell for less than $10,500. The following day Akers sent Crystal a properly executed check for $1,000 with the following notation thereon: "Return of down payment on the sale of truck." After notifying Akers that she will not cash the check, Crystal sues Akers for damages. Should Crystal prevail? Please explain.

3. On May 1, Melforth Realty Company offered to sell Greenacre to Dallas, Inc, for $1,000,000. The offer was made by telegraph and stated that the offer would expire on May 15. Dallas decided to purchase the property and sent a registered letter to Melforth on May 10 accepting the offer. As a result of unexplained delays in the postal service, the letter was not received by Melforth until May 22. Melforth wishes to sell Greenacre to another buyer who is offering $1,200,000 for the tract of land. Has a contract resulted between Melforth and Dallas? Please explain.

ANSWERS:

Question 1a. 

There is no contract.  Justin informed Charles of his decision to sell the boat to another buyer.  This notification took place before Charles accepted the offer.  The law would regard Justin’s notification to be a revocation of the original offer.  This rendered the acceptance Charles sent to be ineffective.

Question 1b. 

There is a contract.  This is the case of the vacillating offeree.  When an offeree responds to an offer by rejecting it and then accepting it, whichever response that reaches the offeror first will control.  The normal rule that an acceptance is effective upon dispatch when a reliable medium is used no longer apply.  In this case, the acceptance reached the offeror before the rejection.

Question 1c.

There is a contract.  The essential point about this question has to do with what Edward said in response to Justin’s offer.  Was this a counter offer or was it something else.  If Edward’s response is a counter offer, this would have the effect of automatically nullifying Justin’s original offer.  Once rejected, the original offer would no longer be available for Edward to accept.  A close examination of Edward’s response indicates that it could not be an offer.  He “wondered if, perhaps Justin would be willing to sell the boat for $3,900.”  Wondering if, perhaps are words indicative of an inquiry as to the firmness of the price, not a counter offer.  Can you understand the difference between an offer saying, “I will give you $3,900 for your boat,” and saying, “I wonder if you would accept $3,900?”  The former is a counter offer, the latter is an inquiry. 

Since Edward did not receive a response to his inquiry, he went ahead and accepted the offer and did so within the established deadline.  There is a contract.

Question 2.

The fact situation says very little about the negotiation between Akers and Crystal, but it clearly states that there was an offer, an acceptance, and a resulting contract.  The contract called for the sale of a new model truck to Crystal for $10,000.  Crystal was required to make a down payment of $1,000 with the balance due when the truck was delivered.  The delivery was scheduled in approximately one week.  The next day, Crystal mailed a $1,000 check as promised. 

Is there an enforceable contract between Akers and Crystal at this point?  No.  There is one serious problem.  The negotiation and the exchange of offer and acceptance were done verbally.  Since this transaction involved a sale of personal property with a value in excess of $500, the Statute of Frauds requires some sort of writing to show that such a transaction was created.  Otherwise, the agreement would be unenforceable.

The question, therefore, is whether there is sufficient writing to show that there was an agreement between Crystal and Akers for the sale of the truck?  The answer in this instance is yes.  The return check that Akers sent to Crystal clearly indicated that there was an agreement for the sale of a truck, and the writing (the check) was signed by Akers, the party who is trying to deny the existence of the agreement to sell the truck.   

Question 3.

Melforth Realty Co made an offer to Dallas, Inc.  This offer had to be accepted by May 15.  Dallas, Inc responded to the offer by issuing an acceptance on May 10, well within the deadline.  The response was made using a registered letter, and the law regards the U.S. Mail as a reliable medium.  For this reason, although the letter of acceptance was not received until May 22, the offer was deemed to have been accepted and a contract came into existence the moment the letter of acceptance was sent on December 10. 

It is important to state the legal principle (an acceptance using a reliable medium is effective upon dispatch) and the correct conclusion (a contract resulted the moment the acceptance was dispatched).

Although the offer was communicated to Dallas Inc by telegram, modern courts allow responses to be made using any reasonable or reliable medium.

In cases such as this, because the subject matter of the contract is so substantial, it is always a good idea for the offeree to place a confirming telephone call or an email after the letter of acceptance has been dispatched indicating that the offer has been accepted.  In order to avoid misunderstandings, the offeror could also have indicated in the offer that an acceptance must be received by May 15 in order to be effective.

Contract Remedies

Contract Remedies

1. Remedies: When a party breaches a contractual promise and refuses to perform, a number of
remedies are available to the injured party. The three most common remedies are:

a. Monetary damages: Awarding money as compensation for a breach of contract is the
most common remedy issued by a court. Monetary damages are only given for losses that
are foreseeable, unavoidable, certain, and consequential.

1) Foreseeable: When a person is trying to decide whether he or she can carry out a
contract promise that he or she made, or to violate it, the person must have a good
idea what the consequences of his or her decision will be. How much will he or she
have to pay in damages for violating the contract? To say that damages must be
foreseeable means that the party who is about to violate a contract must be able to
determine approximately how much he or she will have to pay as a result.

Example: Homer and Barry sign a contract in which Homer promises to sell his
Babe Ruth autographed baseball to Barry for $10,000. Homer refuses to sell when he
discovered that the market value of this baseball is $14,000. Homer should know that
he will be expected to pay Barry damages in the amount of $4,000. The damages in
this case would be the difference between the contract price and the market price. In
this case, the damage was foreseeable because Homer could have made the
calculation based on his knowledge of the market price and the contract price.

2) Damages must be certain: In order to recover damages, the plaintiff cannot simply
make a guess as to what his or her losses are. He or she must be able to show how
much loss he or she suffered. In the above example, Barry could prove how much he
lost as a result of Homer’s breach by having the baseball appraised or by showing a
collector’s magazine containing such an appraisal.

3) Damages must have been unavoidable: When a party is victimized by another
person who refuses to carry out his or her contractual obligations, the injured party
must take steps to mitigate his or her harm.

Example: If a teacher is wrongfully discharged, the teacher simply cannot sit home
and watch TV. The teacher must mitigate the harm he or she suffered by looking for
other teaching positions.

b) Restitution: Restitution is a remedy that compels one party who breached the agreement
to return whatever benefits he or she received. The primary objective of the law, where
contractual remedies are concerned, is to place the injured party in the position that he or
she would have occupied had the other party performed the contract obligation as agreed.
The objective of restitution is to place the injured party in the position that he or she
occupied before the contract was signed. This is an alternative remedy.

Example - violation of Statute of Frauds: Jerry makes an oral promise to be responsible
for the debt of his son, Ken. As a result, Macy’s sells Ken a $1,000 washer/dryer. Ken
cannot pay for the appliance, and Jerry refuses to pay because his promise was not in
writing. Macy’s may simply ask for the return of the appliance.

Example - voidable contracts: Blake sells her car to Lenny for $4,000. Blake said the car
had just 40,000 miles on it. Lenny discovers that the true mileage was 140,000 and
wishes to void the contract. Lenny would be entitled to restitution for the $4,000.

c) Liquidated damages: Parties to a contract may agree in advance as to damages the
parties would have to pay in the event one party breaches. This is called liquidated
damages. Liquidated damages will be enforced if the damages agreed upon reasonably
approximate the damages the injured party might suffer from a breach. If the amount of
the liquidated damages is much higher than the actual damages, it would be seen as a
penalty and would be unenforceable. A liquidated damages provision may be seen as a
penalty if the intent is not to compensate the injured party but to prevent the other party
from breaching the agreement by making the damages as severe as possible.

d) Nominal damages: A breach of contract may take place in which the injured party
cannot show actual damages. In such cases, since a breach did take place, the injured
party would be entitled to at least nominal damages.

e) Remedies in equity: In some cases, damages in the form of money may not be adequate
compensation for the injured party. In such cases, the injured party may request specific
performance, injunction or reformation. Equitable rights are only given when the courts
feel that money damages are insufficient.

1) Specific performance: When specific performance is requested, the injured party is
asking the court to force the other party to carry out the contractual promise. Specific
performance is only given when damages in the form of money are inadequate.

Example: Davis promises to sell his used Toyota to Adelle for $500. Davis refuses to
sell because he found out that the car is worth $560. Adelle can sue Davis for $60, the
difference between the contract price and the market value. With the $60 and her
$500, Adelle will be able to buy a used Toyota of the model and condition she was
hoping to buy from Davis. In this case suing for money damages will place Adelle in
the same position she would have been had Davis kept his promise.

On the other hand, If Davis promised to sell a Picasso painting to Adelle for $100,000
and refused to perform, money damages may not be sufficient to compensate Adelle.
She was promised a one-of-a-kind painting and money simply is not an adequate
substitute. She could sue for specific performance and have a court order Davis to
carry out his part of the bargain.

2) Injunction: An injunction is an equitable remedy in which a court orders a party that
breached a contract from engaging in certain activities.

Example: Thor sells his coin operated Laundromat to Sylvia, and promises not to go
into the coin operated Laundromat business in the same city for one year. Six months
later, he opens a Laundromat a few blocks away from Sylvia’s business. In this case,
Sylvia has a right to ask a court to issue an injunction that prohibits Thor from
opening the new business. Money damages are not adequate in this case, because it
would be difficult for Sylvia to place a dollar figure on the losses she might suffer.

3) Reformation: A contract may be reformed or rewritten if the contract does not
reflect the true intent of the parties. Example: Pacific Lumber Co enters into a contract with Bill which would pay Bill a  pension of $5,000 per month for 5 years. Due to a clerical mistake, the contract states
the Company will pay $500 per month. The contract can be reformed.

Performance, Breach, and Discharge

Performance, Breach, and Discharge

When a valid contract is created, the contract may be discharged for a number of reasons: The
terms of the contract may be fully carried out by the parties, the parties may mutually agree not
to go forward, one party may decide not to perform (breach), or the contract may be discharged
by law.

1. Conditions: A condition is an event whose happening or non-happening will determine
whether a requirement in a contract will have to be performed or not.

Example: Tom will receive 10% of the sale price of Vivian’s car for his help in selling it if
the car can be sold for $5,000 or more. Selling the car for at least $5,000 is a condition for
Tom to receive his commission.

a. Result if the condition is not met: If a condition is not met, the entire contract may fail.
In the above example, if the car is sold for $4,500, the contract agreement that Tom had
with Vivian would never mature to the point where Vivian would have to perform.

1) If a contract promise is not performed: If a party to a contract does not perform a
term in the contract, the contract would still exist and the other party would be able to
sue for breach of contract and receive damages or have the court enforce the contract.

2. Express conditions: This is a condition that is agreed upon by the parties to the contract and
specifically indicated in the contract. An express condition must be fully performed.

a. Personal satisfaction of the contracting party: One common express condition is a
condition that one party to a contract must be satisfied with the performance of the other
party before his or her duty to pay under the contract matures.

Example: Art paints Erica’s portrait with the understanding that Erica will pay Art
$10,000 if she is satisfied with the finished painting. Erica’s satisfaction with the painting
is a condition for her duty to pay. What is the result if Erica is not satisfied with the
painting and refuses to pay even though the painting is an excellent work of art?

1) Subjective standard: Where the subject of the agreement involves a matter where
the “personal tastes” of one party are very important, the party may use his or her
personal judgment in deciding whether he or she is satisfied with the work. The party
must make the judgment in good faith. Professional services (doctors and lawyers)
and painting a portrait are examples of contracts where the personal element is
important.

2) Objective standard: In contracts where the personal taste is not a significant factor,
the objective standard is used. If the finished work would satisfy a reasonable person,
the courts would rule that the condition of personal satisfaction has been satisfied.

3) Result: In the above example, painting a portrait is a matter where the personal taste
of a person would be very important. The facts show that the painting was expertly
made, but Erica was not happy with the result. As long as Erica made her evaluation
in good faith, she would not have to pay.

4) However: If the painting would have satisfied a reasonable person, that evidence may
be important in determining whether Erica was acting in good faith in making her
evaluation.

b. Satisfaction of a third party: A contract may specify that a third party must be satisfied
with the way in which the contract terms were carried out before payment must be made.
Example: Betty signs a contract with Triple-A Home Builders to build a house for her at
a cost of $300,000. The contract states that upon completion of the house, Stewart, the
architect, must issue a certificate of completion before the final payment will be made.
The issuance of the certificate is a condition to Betty having to make the payment.
c. Implied in fact condition: Some conditions are implied from the terms of the contract.

Example: Zack signs a contract to have his piano moved to his brother’s house for $200.
The piano is to be left in the brother’s garage. The garage having sufficient space to
accommodate the piano is an implied condition of this contract.

d. Implied in law condition: Implied in law condition or constructive conditions are used
to fill in missing gaps in contracts. There are two types of constructive conditions:

1) The contract does not state when certain things must be carried out by the parties.
But if the task of each party can be carried out at the same time, the concept of
constructive condition would require that the tasks be performed at the same time.

Example: Eleanor sells her car to Brook for $1,000. Who must perform first? The
contract does not say. Since Eleanor could bring her car, the registration, and key and
Brook could bring the $1,000 at the same time (both parties can perform at the same
time), the concept of constructive condition requires that they both perform at the
same time.

2) When parties sign a contract where one party must do a series of things and the other
party must do just one thing, but the contract does not state who must perform first,
the concept of constructive condition requires that the party who must do a number of
things perform first (condition) and then the other party must perform.

Example: José agrees to pay $10,000 to have a new kitchen installed by Jack. The
contract did not say when the payment must be made. Since Jack must perform
several things (bring the cabinets, prepare the site, etc.), while José need only make
the payment, Jack must perform his part first before Jose’s duty to pay matures.

e. Condition concurrent: When the contract specifies that the parties are to perform their
contractual duties at the same time, each party’s performance is a condition to the other
party’s performance. In the example where Eleanor sold her car to Brook, Eleanor
bringing her car, the keys, and registration is a condition for Brook to pay. Brook
bringing the $1,000 payment is a condition for Eleanor to hand over the car, keys, etc.
Both Brook and Eleanor must perform at the same time.

f. Condition precedent: A condition precedent is a condition that must take place first
before the duty to perform under the contract matures.

Example: Cynthia signs a contract to borrow $200,000 from the Bank of America at 8%
interest. B of A insists that Cynthia’s house, the collateral for the loan, be worth $250,000
before the loan is made. Cynthia’s home being appraised at $250,000 or more is a
condition precedent to the bank making the loan. g. Condition subsequent: A condition subsequent is a condition that attaches to a contract,
and which may invalidate the contract if the condition is violated.

Example: Bill buys a pair of shoes which is sold with a condition that if Bill is not happy
with the performance of the shoes at anytime during the next six months, he may return
them. Bill buys and pays for the shoes, but if the condition subsequent is violated (his not
being happy with the shoes), Bill may return the shoes and void the contract.

3. Discharge by performance: When both parties have completed their requirements under
the contract, the contract has been discharged.

4. Discharge by breach: A breach takes place when one party refuses to perform his or her part
of the agreement. When a breach takes places, the responsibilities of the other, non-
breaching, party will depend upon several factors.

a. Material breach: A material breach takes place when a party, due to the other party’s
refusal to perform the agreement, does not receive the substantial benefit of the contract.

Example: Grace agrees to pay $6,000 for her house to be painted. The painters paint 1/3
of the house and stop. A material breach has taken place. Grace is excused from
performing her part of the agreement (pay the $6,000).

1) Prevention of performance: When one party takes steps that make it impossible or
very difficult for the other party to perform, a material breach has taken place.

Example: Nolan hires Sam to prepare his daughter, Sherrie, for an important piano
recital. Payment is to be made when the recital is completed. Nolan is not happy with
Sam’s teaching methods and persuades Sherrie not to cooperate. Nolan has made it
difficult or impossible for the contract to be performed.

b. Substantial performance: If one party has breached the contract, but substantially
performed his or her part of the contract, the law will require the other party to perform.
Of course, the other party will be able to sue for damages that he or she suffered because
the first party did not completely perform.

Example: In the example where José contracted with Jack to install a new kitchen, if
Jack did everything in the contract except that the light switches were placed one inch
higher than Jose wanted, Jack has substantially performed. José must pay the contract
price. He can also sue Jack for damages for the improper placement of the switches.

c. Anticipatory repudiation: An anticipatory repudiation is an act by one party to a
contract that lets the other party know that he or she does not intend to carry out his or
her contractual agreement.

Example: Kay hires the firm of Party Guys to provide catering services for her husband’s
70th birthday for $5,000. A week before the party, Party Guys informs Kay that it will
not be able to provide the service. Party Guys has breached the agreement. Kay does not
have to perform her part of the agreement and can sue immediately.

d. Material alteration of a written contract: If one party, without authorization, makes a
material changes in the contract, the entire contract has been discharged. The change or
changes must be material and made fraudulently, and made by a party to the contract or
by someone who is acting for a party to the contract.

5. Discharge by agreement of the parties: The parties to a contract may always negotiate with
one another for the existing contract to be discharged. The discharges can take place in a
number of ways.

a. Mutual rescission: This is simply a contract (an agreement) to end an existing contract.
For it to be enforceable, it must be supported by consideration.

b. Substituted contracts: The parties to an existing contract may negotiate a second
contract to replace the existing one.

c. Accord and satisfaction: An accord and satisfaction is an agreement whereby one party
agrees to do something in order to discharge an existing debt.

d. Novation: A novation is a new contract that replaces the terms of the existing agreement.
In a novation, a new promisee or a new promisor will be appointed.

Example: Blake promised to pay Ed $500 for a painting that Ed completed. Subsequently
Ed and Blake make a new agreement in which Blake will make the payment to Sid.
Example: In the above example, Blake and Ed enter into a new agreement whereby
Blake’s friend Patricia will make the payment to Ed.

e. Discharge by operation of law: Under certain conditions, a party may be discharged
from performing his or her part of the agreement by law.

1) Impossibility: Because of the happening of an event, it may be impossible for anyone
to perform the terms of an agreement. Such objective impossibility would discharge
the contract.

Example: Carley signs an agreement with Chevron to buy 40,000 gallons of gasoline
each month for her service station. Ten days after the agreement is signed, the federal
government issues a moratorium on the sale of all gasoline products. The contract
between Carley and Chevron would be rescinded.

2) Subsequent illegality: When the subject of a contract becomes illegal after the
contract is signed but before it is to be performed, the parties to the contract are
excused from performance.

3) Frustration of purpose: After the contract is signed, the parties’ primary reason for
making the contract can no longer be carried out (or performed at great cost) due to
no fault of either party. In this case, the parties are discharged from the contract.
Example: Roy buys a ticket from Tickets.com to a Tony Bennett concert. Tony
breaks a leg on the morning of the concert and decides to cancel the performance. The
contract has been rescinded.

4) Commercial impracticability: The restatement and the UCC have relaxed the rule
regarding contractual impossibility by excusing performance if unforeseen hardships
would make it very difficult for one party to a contract to perform. Any unforeseen
hardship will not suffice. The hardship could not have been anticipated, was not the
fault of either party, neither party assumed the risk that the event would take place,
and the event would make performance impractical.

5) Discharge by bankruptcy: If a party to a sales contract files for bankruptcy, the
party’s obligation to pay under the contract will be discharged.
6) Statute of Limitations: All states have a time limit within which law suits for breach
of contracts must be made. If the time is allowed to lapse, action cannot be brought to
enforce the agreement.

Third Parties to Contracts

Third Parties to Contracts

In our study of contracts up to this point, there were generally two parties to the agreement: the
offeror and the offeree. In some contracts, however, there may be a third party. The third party
may be there as a result of one party assigning his or her rights under the contract to another
person or as a result of one party delegating his or her responsibilities under the contract to
another party. In a third case, a contract may specify that some performance be directed not for
the benefit of one of the parties to the contract but to another person who is called the third party
beneficiary.

1. Assignments of rights: In every contract, a right and an obligation are created. If Thomas
promises to paint Sandra’s house for $10,000, Thomas has the obligation to paint the house
and Sandra has the obligation to pay $10,000. In return, Sandra would have the right to have
her house painted and Thomas would have the right to receive $10,000 in payment.
a. Obligor and obligee: The person with the obligation to perform is called the obligor and
the person who will receive the benefit of the bargain is called the obligee.

b. Assignment: An assignment of a contractual right takes place when one of the original
parties to the contract indicates that the benefits of the contract be given not to the obligee
but to a third person.

Example: Mark, who was injured by slates falling from a roof, sues the home owner.
They sign a settlement in which the home owner’s insurance company will pay Mark
$30,000 per year for the next ten years. After receiving the first year’s payment, Mark
indicates that the second year’s payment be made not to him but to his nephew Nick.
Mark has made an assignment of his rights under the contract.

1) Assignor and assignee: The person making the assignment is called the assignor and
the person who is designated to receive the benefits of the contract is called the
assignee. In the above example, Mark is the assignor and Nick is the assignee.

2) Consideration: Consideration is not required for an assignment to take place.

3) Revocability of assignments: If the assignee gives consideration in return for the
assignment, the assignment is irrevocable. If the assignment is a gift (no consideration
given in return), the assignor may revoke the assignment as long as the object of the
assignment has not been delivered to the assignee.

a) Partial assignments: Partial assignments, where the assignment is made to a
number of people, are permitted. If a partial assignment is made and a lawsuit is
brought by one of the assignees against the obligor, the obligor may require all the
assignees to sue in one case.

Example: Johnson owes Smith $10,000. Smith assigns half of the right to the
money to Bailey and the other half to Thompkins. If Johnson does not pay and
Smith and Bailey decide to sue, Johnson may require them to sue together in one
trial. This will prevent Smith and Thompkins from suing in different trials.

c. Rights that may not be assigned: In most cases, just about any contract right may be
assigned. There are exceptions. Contract rights that may not be assigned include:

1) Assignments that materially increase the duty, risk, or burden of the obligor. An
assignment cannot be made if it would greatly increase the duty or risks of the
obligor.

Example: Paula buys auto insurance from Triple A. Paula is a good driver. She
assigns her insurance coverage to Jane who has a terrible driving record. In this case,
the assignment would impose greater risks upon the insurance company. For this
reason, the assignment cannot be made.

2) Assignments that transfer highly personal contract rights. Some rights are so
personal they cannot be assigned to another person.

Example: Jennifer and Stanley exchange promises to marry one another. Jennifer
assigns this right to her best friend Mary. This assignment is one where the personal
element is so important, the assignment may not be made.

3) Assignments that are specifically prohibited by contract. When a contract contains
a provision preventing assignments, the courts will interpret this clause very narrowly
as just a promise not to assign, rather than a clause prohibiting assignments
altogether. The distinction is important because a promise not to assign means that an
assignment can be made, but the assignor must pay damages for breaking the promise
not to do so.

4) Assignments that are prohibited by law. Local, state, federal statutes and public
policy prevents the assignment of certain types of contracts.

Example: By law, assignments of future wages cannot be made in many jurisdictions.
d. Rights of the assignee: When the assignee receives an assignment, he or she stands in
the shoes of the assignor with respect to the contract. If the other party to the contract has
some defenses that can be used against the assignor, it can also be used against the
assignee.

Example: Nathan uses fraud to sell a car to Charles for $2,000. Nathan assigns the right
to receive the $2,000 to Lenny. Charles has a defense of fraud against Nathan. Since
Lenny is now standing in Nathan’s shoes with respect to the contract, Charles may use
this defense against Lenny and refuse to make the payment.

Example: The claim the obligor can assert against the assignee need not arise from the
contract itself. For example, Paula sells her car to Rose for $4,000. Paula, however, owes
Rose $4,000 on a personal loan that she had received from her. If Paula assigns the rights
to receive the $4,000 to Jonathan, Rose could offset the $4,000 payment she must make
against the $4,000 that Paula owes.

e. Notice to the obligor of the assignment: When an assignment is made, the assignee or
the assignor should notify the obligor. If notification is not made and the obligor pays the
assignor, the obligor’s responsibilities are fully discharged.

1) Protection against subsequent events: Notification of assignment is important
because it can protect the assignee against subsequent dealings between the obligor
and assignor. Example: Gary sells his piano to Linda for $1,000. Gary assigns the rights to receive
the $1,000 to Andy, but notice of the assignment is not made to Linda. Subsequently,
Gary borrows $1,000 from Linda and Linda offsets the $1,000 she must pay for the
piano against the loan. Linda may do this since she had no notice of the assignment.
Had Andy or Gary given notice of the assignment to Linda, Linda could not have
made the offset.

2) Implied warranties of the assignor: When an assignor makes an assignment for
value, he or she gives the following implied guarantees:

a) The assignor will do nothing to damage the assignment,

b) The assigned rights exist and are not subject to any defenses other than those
indicated,

c) Any evidence that is presented to the assignee as evidence of the assigned rights is
genuine,

d) The assignor has no knowledge of any fact that would impair the value of the
assignment.

f. Express warranties of assignor: If the assignor makes an express promise in connection
with an assignment, the assignor will be bound by the promise he or she made.

1) Guarantee of performance by the obligor: Unless the assignor specifically
guarantees that the obligor will pay the assignee, this risk is assumed by the assignee.

g. Assignment of same right to more than one person: What if an assignor assigns the
same right to more than one person?

Example: Dale sold his antique chair to Nora for $500. He assigned the right to the $500
to Vicky for $450 because he needed the money right away. Four days later, Dale
assigned the right to receive the $500 to Wade in return for $450. When Nora is ready to
pay, who should get the money?

1) Majority rule: The first assignee (Vicky) will get the money.

2) Minority rule: The first assignee to notify the obligor will get the money.

3) Restatement rule:

a) The first assignee will win unless
b) The first assignment is voidable by the assignor or
c) The second assignee gives value in good faith and without knowledge of the prior
assignment and can show one of the following:

(1) receives payment from the obligor
(2) obtains a judgment against the obligor
(3) obtains a new contract with the obligor
(4) obtains documentary evidence of the assigned right

2. Delegation of duties: A duty to do something under a contract may be delegated to another. Example: Lamar buys a Ford Taurus from Concord Ford for $21,000. Concord Ford,
however, sold the last Taurus in stock to another customer. Concord Ford arranges with a
Ford dealership in San Francisco to deliver a Ford Taurus to Lamar. Concord Ford has
delegated its contractual duty to another party to perform.

a. Parties to a delegation:

1) Delegator: The party making the delegation is the delegator. In the above example,
the delegator would be Concord Ford.

2) Delegatee: The new party who assumes the responsibility to perform under the
contract is the delegatee. In the above example, the delegatee would be the
San Francisco Ford dealer.

a) Assumption of the delegated duty: In order for the delegation to be effective, the
delegatee must accept the delegation and assume the delegated duty.

3) Obligee: The obligee is the person who is entitled to receive the performance under
the contract. In the above example, the obligee would be Lamar.

b. Prohibition on delegation: Delegations cannot be made if:

1) The delegator’s performance requires a very high degree of skill that is personal to
the delegator so that the same performance by another person would not be the same
2) Delegation is prohibited by contract
3) Delegation is prohibited by public policy.

Courts will review delegation of responsibilities more closely than assignments
because it places the obligee in the position of receiving performance from a person
that the obligee did not select. For this reason, the court will strike down a delegation
unless the obligee will receive the same performance that he or she negotiated in the
contract.

c. Duties of the parties: When a delegation is made, the delegator is still responsible for the
performance of the contract. If there is a defective performance or non performance by
the delegatee, the obligee may sue either the delegator or the delegatee or both.
Example: Robert signs a contract with Martin for Martin to clean out his garage. Martin
delegates the duty to Ned. If Ned does not perform, Robert may sue both Martin and Ned.
The job has been delegated, but Martin is still liable.

1) Novation: Novation is a case where a new contract is negotiated and it replaces an
existing contract. A novation is more than a mere delegation, where the responsibility
for performing under an existing contract is assigned to another person. When the
duty to perform is given to another person by way of a new contract, the original
party is no longer liable for performance.

Example: In the above case where Martin signed a contract to clean Robert’s garage,
if Martin and Robert negotiate to end the contract between them and create a new one
in which Ned will be responsible for the cleanup, Martin’s responsibility for the job
will come to an end. 2. Third party beneficiary contracts: In most contracts, one party (promisor) promises to  render performance to the other party to the contract (promisee). In some cases, the promisor
will promise to do something, not for the promisee but for a third person indicated by the
promisee. This kind of a contract is a called a third party beneficiary contract.

Example: Nelson signs a contract to buy a car from Burlingame Lexus for his daughter
Nellie. The parties to this contract are Nelson and Burlingame Lexus. Nellie is an intended
beneficiary.

a. Classification of intended beneficiaries: Intended beneficiaries can be classified as
donee beneficiaries and creditor beneficiaries.

1) Donee beneficiary: A donee beneficiary is a person who is receiving benefits as a
gift. In the above example, Nellie appears to be a donee beneficiary.

2) Creditor beneficiary: If a third party is named as a beneficiary of a contract in order
to settle an existing debt to that person, the third party is a creditor beneficiary.

Example: Sally borrows $50,000 from Henry to start a small high-tech business. She
succeeds in landing a great sales contract with IBM and arranges for the first payment
of $50,000 to be made to Henry as a partial settlement of the loan. Henry is a creditor
beneficiary.

b. Rights of the intended beneficiary:

1) Creditor beneficiary: A creditor beneficiary may sue both parties for performance.
In the example of the contract between Sally and IBM, Henry may sue both Sally and
IBM if he does not receive payment.

2) Donee beneficiary: A donee beneficiary may only sue the party who has arranged for
the gift. In the above example involving Nelson and Burlingame Lexus, Nellie may
only sue Nelson. This is because Nellie’s contractual obligations are with Nelson, not
the automobile dealership.

c. When the legal rights of the third party beneficiaries vest (become enforceable):
Until the rights of the third party beneficiaries vest (take effect) the two parties to a
contract may change the terms of the agreement and omit the third party. When the rights
of the third parties to enforce the terms of the contract take effect varies from state to
state:

1) Contract is signed: In some states, as soon as the contract is signed the rights of the
third party will vest.

2) Contract is signed and third party is informed: In some states the third party must
learn of the contract and agree to it.

3) Contract is signed; the third party is informed and changes his or her position in 
reliance:

4) Restatement: The restatement requires that the contract be made, and the intended
beneficiary responds with one of the following:

a) Sues to enforce the agreement
b) Changes his or her position in reliance upon the agreement
c) Gives his or her assent to the contract