Thursday, July 31, 2014
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.
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.
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
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
Contracts in Writing
Contracts in Writing
In general, an oral contract is just as valid as a written one. However, when it comes to proving
the existence of a contract or the specific terms of a contract, having the agreement in writing is a
significant benefit. In certain types of contracts, the law requires that it must be in writing.
1. Statute of Frauds: Certain categories of contracts covered by the Statute of Frauds must be
in writing and signed by the party against whom the contract is to be enforced. The following
contracts fall within the coverage of the Statute of Frauds:
a. Promise to be responsible for the debt of another: When a person agrees to be
responsible for the debts of another person, that promise must be in writing and signed.
Example: Ann signs a contract with Fairlane Ford to buy a new Mustang automobile.
Ann’s father also signs the agreement, promising to make the payment if Ann fails to do
so. Since Ann’s father is promising to be responsible for the debt of another person, the
promise must be in writing and signed by him.
Exception: Gordon holds a note from Annette in which Annette promises to repay
$1,000 each month for the next year. Gordon would like to sell the note, and in order to
make the note as attractive as possible, promises to pay the late payment penalty in the
event Annette misses a payment. Even though Gordon is promising to be responsible for
Annette’s debt, the promise is being made for Gordon’s benefit (to make his note as
attractive as possible). In this case, because the primary intent is to benefit Gordon rather
than being responsible for Annette’s debt, the promise need not be in writing.
b. Promises of an executor-administrator: Promises made by an executor of a will or an
administrator of an estate to pay the debts of the decedent out of the executor or
administrator’s own funds are not enforceable unless it is in writing.
1) Promises made by an administrator or executor to pay the debt of the decedent out of
the funds of the decedent’s estate are enforceable even though it is not in writing.
c. Promise to marry: The Statute of Frauds does not apply to mutual promises to marry. It
applies to promises made as a part of a promise to marry.
Example: Johnson promises to marry Taylor and promises to buy a house and put the
house in Taylor’s name. The promise to buy the house must be in writing.
d. Sale of real property: Contracts for the sale of real property must be in writing.
2) Exception for part performance: An oral contract for the sale of real property will
be enforced if the party seeking to enforce the agreement significantly changed his or
her position in reasonable reliance on the oral promise so that it would be unfair not
to enforce the agreement. In most states, the party must have paid all or part of the
purchase price and have either taken possession or started making valuable
improvements to the property.
3) Exception where conveyance has been made: An oral agreement to sell real
property will be upheld where the seller has already conveyed the land to the buyer.
b. Contracts that cannot be performed within one year: If a contract cannot be
performed within one year of the making of the contract, it must be in writing.
1) Possibility of performance: In applying the one-year rule, the court will look at the
agreement and ask if there is any possibility, no matter how unlikely, that the contract
could be performed within one year. If the answer is yes, the contract will be
enforceable even though it is not in writing.
Example: Don’s boss offers Don an oral contract for lifetime employment with his
company. Is this contract enforceable even though it is not in writing? To answer this
question, ask whether this contract could be performed within one year. If the answer
is yes, it need not be in writing. In this case, the answer is yes because Don could die
before the year is up.
(a) Calculation of the time: The year starts from the time the agreement is made, not
from the time when performance is scheduled to start.
(b) Full performance by one party: If one party has fully performed his or her part
of an oral agreement that cannot be completed within one year, the contract is
now enforceable.
(c) Example: A contract to employ Thompson for 13 months must be in writing
since it cannot be performed within one year.
c. Sale of goods in excess of $500: When a contract is made to sell personal property for
$500 or more, it must be in writing. Exceptions are:
1) If a party admits the existence of an oral contract for the sale of goods for $500 or
more, it will be enforced. Such admissions may result from performance over a
period of time.
2) If an oral contract is made for the sale of custom made goods valued at $500 or more,
it will be enforced.
3) When a party actually delivers and accepts goods valued at $500 or more pursuant to
an oral contract, the courts will enforce the contract to the extent of the goods actually
delivered and accepted.
2. Electronic contracts: In most states, an electronic contract that meets the state requirements
for an electronic contract will satisfy the Statute of Fraud requirement for a written contract.
3. Modification of existing contracts within the Statute of Frauds: An oral modification of
an existing contract that falls within the coverage of the Statute of Frauds is not enforceable
if the resulting contract would also fall within the coverage of the Statute of Frauds.
Example: Bill signed a contract promising to be responsible for his son’s debt. If his son
takes on an additional debt, Bill’s promise to be responsible for the additional debt must also
be in writing in order to be enforceable. The additional debt is covered by the Statute of
Frauds.
Example 2: Universal Transport Co and Cindy Barnes entered into a 20 month employment
contract. This contract was in writing in order to comply with the Statute of Frauds (contract
that cannot be performed within one year). A modification of the employment contract
reducing the term of employment to 7 months need not be in writing. This is because the
employment term is less than one year and, therefore, not covered by the Statute of Frauds.
4. What writing is required by the Statute of Frauds: The Statute of Frauds requirement that
the contract be in writing can be satisfied by any writing that contains the following
information:
a. The names of the parties to the agreement
b. The subject matter and essential terms of the agreement
c. The signature of the party to be charged
The contract may simply be a memorandum of understanding between the parties as long
as it contains the information indicated above. The writing may consists of several
memoranda or letters, and the signature may be an abbreviation or printed or typed as
long as it was intended by the party as a substitute for the signature.
5. Consequences when the Statute of Frauds is violated: Generally, a contract that does not
comply with the Statute of Frauds is unenforceable.
a. Fully performed oral contracts: Once the parties to an oral contract fully perform, the
contract is considered to be outside the coverage of the Statute of Frauds.
b. Restitution for services already rendered: If a party partially performs the terms of an
unenforceable oral contract, that party is entitled to restitution for the work that was done
or for the products that were delivered.
c. Promissory Estoppel: Where a party has performed in reliance upon an oral contract,
many courts will enforce the oral agreement if the elements of promissory estoppels are
present.
6. Parol evidence rule: When two parties negotiate a complex contract, there may be numerous
meetings where a number of promises are made. If a contract should result, all the promises
that were made may also become a part of the contract even though they are not included in
the final document (contract). This may prove to be very confusing when it comes time for
the parties to carry out the terms of the contract. The parol evidence rule was developed to
deal with this situation. The rule states that when the parties to a contract agree that the final
contract is complete and contains all the promises and obligations between them, neither
party to the agreement may introduce outside (outside of the contract) evidence that would
vary the terms of the contract. The intent of the rule is to have one written document that
both parties recognize as containing all the terms and conditions of their agreement.
a. Exceptions to the rule: There are a number of cases where outside evidence (parol
evidence) would be allowed to come in. These instances are:
1) Outside evidence that will clarify, explain, and correct: Parol evidence may be
introduced to explain parts of the contract.
2) To show lack of capacity: If one of the parties to the contract lacked capacity, parol
evidence may be introduced to show this.
3) To show defenses to a contract: If there are possible defenses that would make the
contract void or voidable, this evidence (parol evidence) may be introduced.
4) To show that a contract was replaced by another contract: Parol evidence is
always admissible to show that one contract was replaced by another. b. Supplemental evidence: The UCC does allow the following types of evidence to be
introduced in order to explain parts of the existing contract that may be unclear.
1) Course of dealing between the two parties: If previous dealings between the two
parties provide some clue that would help clarify terms of the contract, such evidence
may be admitted.
2) Usage of trade: Accepted practices in a given trade or profession may also be used to
help explain a portion of the contract that is unclear.
3) Course of performance: The extent to which both parties have accepted the
performance of the other party that may not have been specifically indicated in the
contract.
7. Interpretation of contracts: A court will use the following guidelines in interpreting
portions of a contract that may not be clear:
a. Specific contract clauses that are unclear will be interpreted in light of all the
circumstances and the entire contract ,
b. Words will be given their plain and ordinary meaning unless specialize usage is
warranted,
c. Specific and exact terms are given more weight than general language,
d. Specifically negotiated terms will be given greater weight than standardized contract
language,
e. Past performance and common trade terms, where applicable, can be used to clarify terms
in the contract,
f. Where there is inconsistency between written and printed or typed terms, the written
terms will be given greater weight. Where there is inconsistency between printed and
typed terms, the typed terms will be given greater weight.
In general, an oral contract is just as valid as a written one. However, when it comes to proving
the existence of a contract or the specific terms of a contract, having the agreement in writing is a
significant benefit. In certain types of contracts, the law requires that it must be in writing.
1. Statute of Frauds: Certain categories of contracts covered by the Statute of Frauds must be
in writing and signed by the party against whom the contract is to be enforced. The following
contracts fall within the coverage of the Statute of Frauds:
a. Promise to be responsible for the debt of another: When a person agrees to be
responsible for the debts of another person, that promise must be in writing and signed.
Example: Ann signs a contract with Fairlane Ford to buy a new Mustang automobile.
Ann’s father also signs the agreement, promising to make the payment if Ann fails to do
so. Since Ann’s father is promising to be responsible for the debt of another person, the
promise must be in writing and signed by him.
Exception: Gordon holds a note from Annette in which Annette promises to repay
$1,000 each month for the next year. Gordon would like to sell the note, and in order to
make the note as attractive as possible, promises to pay the late payment penalty in the
event Annette misses a payment. Even though Gordon is promising to be responsible for
Annette’s debt, the promise is being made for Gordon’s benefit (to make his note as
attractive as possible). In this case, because the primary intent is to benefit Gordon rather
than being responsible for Annette’s debt, the promise need not be in writing.
b. Promises of an executor-administrator: Promises made by an executor of a will or an
administrator of an estate to pay the debts of the decedent out of the executor or
administrator’s own funds are not enforceable unless it is in writing.
1) Promises made by an administrator or executor to pay the debt of the decedent out of
the funds of the decedent’s estate are enforceable even though it is not in writing.
c. Promise to marry: The Statute of Frauds does not apply to mutual promises to marry. It
applies to promises made as a part of a promise to marry.
Example: Johnson promises to marry Taylor and promises to buy a house and put the
house in Taylor’s name. The promise to buy the house must be in writing.
d. Sale of real property: Contracts for the sale of real property must be in writing.
2) Exception for part performance: An oral contract for the sale of real property will
be enforced if the party seeking to enforce the agreement significantly changed his or
her position in reasonable reliance on the oral promise so that it would be unfair not
to enforce the agreement. In most states, the party must have paid all or part of the
purchase price and have either taken possession or started making valuable
improvements to the property.
3) Exception where conveyance has been made: An oral agreement to sell real
property will be upheld where the seller has already conveyed the land to the buyer.
b. Contracts that cannot be performed within one year: If a contract cannot be
performed within one year of the making of the contract, it must be in writing.
1) Possibility of performance: In applying the one-year rule, the court will look at the
agreement and ask if there is any possibility, no matter how unlikely, that the contract
could be performed within one year. If the answer is yes, the contract will be
enforceable even though it is not in writing.
Example: Don’s boss offers Don an oral contract for lifetime employment with his
company. Is this contract enforceable even though it is not in writing? To answer this
question, ask whether this contract could be performed within one year. If the answer
is yes, it need not be in writing. In this case, the answer is yes because Don could die
before the year is up.
(a) Calculation of the time: The year starts from the time the agreement is made, not
from the time when performance is scheduled to start.
(b) Full performance by one party: If one party has fully performed his or her part
of an oral agreement that cannot be completed within one year, the contract is
now enforceable.
(c) Example: A contract to employ Thompson for 13 months must be in writing
since it cannot be performed within one year.
c. Sale of goods in excess of $500: When a contract is made to sell personal property for
$500 or more, it must be in writing. Exceptions are:
1) If a party admits the existence of an oral contract for the sale of goods for $500 or
more, it will be enforced. Such admissions may result from performance over a
period of time.
2) If an oral contract is made for the sale of custom made goods valued at $500 or more,
it will be enforced.
3) When a party actually delivers and accepts goods valued at $500 or more pursuant to
an oral contract, the courts will enforce the contract to the extent of the goods actually
delivered and accepted.
2. Electronic contracts: In most states, an electronic contract that meets the state requirements
for an electronic contract will satisfy the Statute of Fraud requirement for a written contract.
3. Modification of existing contracts within the Statute of Frauds: An oral modification of
an existing contract that falls within the coverage of the Statute of Frauds is not enforceable
if the resulting contract would also fall within the coverage of the Statute of Frauds.
Example: Bill signed a contract promising to be responsible for his son’s debt. If his son
takes on an additional debt, Bill’s promise to be responsible for the additional debt must also
be in writing in order to be enforceable. The additional debt is covered by the Statute of
Frauds.
Example 2: Universal Transport Co and Cindy Barnes entered into a 20 month employment
contract. This contract was in writing in order to comply with the Statute of Frauds (contract
that cannot be performed within one year). A modification of the employment contract
reducing the term of employment to 7 months need not be in writing. This is because the
employment term is less than one year and, therefore, not covered by the Statute of Frauds.
4. What writing is required by the Statute of Frauds: The Statute of Frauds requirement that
the contract be in writing can be satisfied by any writing that contains the following
information:
a. The names of the parties to the agreement
b. The subject matter and essential terms of the agreement
c. The signature of the party to be charged
The contract may simply be a memorandum of understanding between the parties as long
as it contains the information indicated above. The writing may consists of several
memoranda or letters, and the signature may be an abbreviation or printed or typed as
long as it was intended by the party as a substitute for the signature.
5. Consequences when the Statute of Frauds is violated: Generally, a contract that does not
comply with the Statute of Frauds is unenforceable.
a. Fully performed oral contracts: Once the parties to an oral contract fully perform, the
contract is considered to be outside the coverage of the Statute of Frauds.
b. Restitution for services already rendered: If a party partially performs the terms of an
unenforceable oral contract, that party is entitled to restitution for the work that was done
or for the products that were delivered.
c. Promissory Estoppel: Where a party has performed in reliance upon an oral contract,
many courts will enforce the oral agreement if the elements of promissory estoppels are
present.
6. Parol evidence rule: When two parties negotiate a complex contract, there may be numerous
meetings where a number of promises are made. If a contract should result, all the promises
that were made may also become a part of the contract even though they are not included in
the final document (contract). This may prove to be very confusing when it comes time for
the parties to carry out the terms of the contract. The parol evidence rule was developed to
deal with this situation. The rule states that when the parties to a contract agree that the final
contract is complete and contains all the promises and obligations between them, neither
party to the agreement may introduce outside (outside of the contract) evidence that would
vary the terms of the contract. The intent of the rule is to have one written document that
both parties recognize as containing all the terms and conditions of their agreement.
a. Exceptions to the rule: There are a number of cases where outside evidence (parol
evidence) would be allowed to come in. These instances are:
1) Outside evidence that will clarify, explain, and correct: Parol evidence may be
introduced to explain parts of the contract.
2) To show lack of capacity: If one of the parties to the contract lacked capacity, parol
evidence may be introduced to show this.
3) To show defenses to a contract: If there are possible defenses that would make the
contract void or voidable, this evidence (parol evidence) may be introduced.
4) To show that a contract was replaced by another contract: Parol evidence is
always admissible to show that one contract was replaced by another. b. Supplemental evidence: The UCC does allow the following types of evidence to be
introduced in order to explain parts of the existing contract that may be unclear.
1) Course of dealing between the two parties: If previous dealings between the two
parties provide some clue that would help clarify terms of the contract, such evidence
may be admitted.
2) Usage of trade: Accepted practices in a given trade or profession may also be used to
help explain a portion of the contract that is unclear.
3) Course of performance: The extent to which both parties have accepted the
performance of the other party that may not have been specifically indicated in the
contract.
7. Interpretation of contracts: A court will use the following guidelines in interpreting
portions of a contract that may not be clear:
a. Specific contract clauses that are unclear will be interpreted in light of all the
circumstances and the entire contract ,
b. Words will be given their plain and ordinary meaning unless specialize usage is
warranted,
c. Specific and exact terms are given more weight than general language,
d. Specifically negotiated terms will be given greater weight than standardized contract
language,
e. Past performance and common trade terms, where applicable, can be used to clarify terms
in the contract,
f. Where there is inconsistency between written and printed or typed terms, the written
terms will be given greater weight. Where there is inconsistency between printed and
typed terms, the typed terms will be given greater weight.
Sample Situation
Please read the fact situation carefully, and using your knowledge of contract law, decide whether there is a contract between Jack and Cliff and between Jack and Cynthia and explain why.
On Thursday, May 14, Jack received the following letter from Cynthia:
Dear Jack, I will let you have my `Cynthia House' for this June-through-
August season, same terms under which you occupied it last year.
Please reply in a week."
Jack notice Cynthia's letter was postmarked May 11.
Earlier in May, Jack had made inquiry at "The Cliffs," a mountain resort owned by Cliff. In Cliff's absence, Joe, one of Cliff's caretaker, had shown Jack two available house, "Hi-Vu" and "Lo-Vu," owned by Cliff, which Joe stated were listed for rent at $6,000 and $3,000 respectively, for one season.
On May 15, Jack received a letter from Cliff which read,
"This confirms statements by Joe. You may have Hi-Vu at $6,000,
or Lo-Vu at $3,000, for the season June through August, all services
included, payable in equal monthly installments."
On May 17, Jack wrote to Cliff as follows,
"I think your prices are high. Will you take $5,000 for Hi-Vu?
If not, then I'll have to settle for Lo-Vu, and I agree to pay the
$3,000 you ask, only I hope you may be willing to consider some
concession if I pay the whole $3,000 in advance."
On May 17, Jack learned that Cynthia had sold Cynthia House to Jones for Jones' immediate occupancy.
On May 18, Cliff received Jack's letter and Cliff immediately telegraphed Jack,
"No change in prices. See my letter of the 16th."
Jack received Cliff's telegram the same day, May 18; and later that day Jack also received Cliff's letter of May 16, which read,
"Our deal is off."
Jack immediately wrote Cynthia,
"I'll take Cynthia House per your letter of the 11th."
The normal course of post between Jack and Cynthia and Jack and Cliff was one day.
What rights, if any, does Jack have against Cynthia and Cliff?
Subscribe to:
Posts (Atom)