CONDITIONS Last class covered the elements necessary to make a contract. 1. Offer 2. Consideration 3. Acceptance
CONDITIONS This section concerns WHEN and HOW performance will be carried out. While not necessary to any contract, many contracts contain conditions.
CONDITIONS Book Definition: An event that may or may not happen, but which the rest of the performance of the contract rests. Restatement: “an event, not certain to occur, which must occur, unless its non- occurrence is excused, before performance under a contract becomes due.”
CONDITIONS A condition is different from a covenant A covenant is the promise upon which the contract rests. What a party to the contract has promised to do.
CONDITIONS How do you tell the difference? You have to do some reasonable interpretation. Ifthere is doubt, a court will treat it as a covenant. Conditions are distinguishable in part because they are NOT promises.
CONDITIONS Condition Precedent: “an event which must take place before a party to a contract must perform or do their part” http://legal-dictionary.thefreedictionary.com/condition+precedent
CONDITIONS Condition Subsequent: “a happening which terminates the duty of a party to perform or do his/her part.” http://legal- dictionary.thefreedictionary.com/condition+subsequent
CONDITIONS How do you excuse performance after it has already occurred? You undo it or you stop the continuing performance
CONDITIONS Condition Subsequent Examples Returningmerchandise to a store – By returning the merchandise with a receipt , tags and in packaging (condition subsequent) the customer is excused from performance (payment) Alimony payments – Husband is under a duty to pay until and unless wife remarries (condition subsequent).
CONDITIONS Conditions can be express or implied. Express: conditions stated in the contract. Implied: not stated but arise anyway for one of two reasons.
CONDITIONS Implied Conditions 1.Implied in Fact: Conditions that must exists in order for the terms of the contract to make sense. 2. Implied in Law: Conditions imposed by the court to ensure fairness and justice. Duty of good faith and fair dealing. You cannot undermine another party’s interests.
CONDITIONS Implied in fact examples: That the parties will be alive to perform on the contract Real estate taxes are paid on a property to be purchased.
CONDITIONS IMPLIED IN LAW EXAMPLE Fergus contracts to provide consulting services for a flat fee of $1,000. After Fergus performs the services, the other party attempts to pay with 1,000 Canadian Dollars. Both Fergus and the client live in Florida, but the written agreement does not specifically state a type of currency. Fergus files suit, asking the judge to impose a implied- in-law condition on their agreement and to order the client to pay in American dollars even though the contract did not specify it. http://law-dictionary.clearpointlaw.com/i/implied-in-law- condition_Obl.aspx
CONDITIONS ANOTHER NOTE ON IMPLIED IN LAW CONDITIONS Ifyou ever hear someone use the term “technically”, it should be a red flag. That person is probably trying to undermine another’s interests and frustrate the purpose/benefit of the contract.
CONDITIONS 1. Condition versus Covenant 2. Types of Conditions Precedent, subsequent, concurrent 3. How creates Express, Implied in Fact, Implied in Law
THIRD PARTY INTERESTSIn some instances, there are parties to thecontract other than the offeree and offeror.In some contracts, there is a third partybeneficiary.
THIRD PARTY INTERESTS Third Party Beneficiary: A person, not a party to the contract, who stands to receive the benefit of performance of the contract.
THIRD PARTY INTERESTS Example: Grandma enters into a contract with Oldfield to purchase a Jaguar automobile to be given to grandchild as a graduation present. If Oldfield takes a down payment and then refuses to go through with the sale, grandchild may sue Oldfield for specific performance of the contract as a third-party beneficiary.
THIRD PARTY INTERESTS Most important right conferred upon the third party beneficiary is the right to sue for breach of contract.
THIRD PARTY INTERESTS This is important because, normally, if someone has no privity , then they have no standing to sue to enforce a contract.
THIRD PARTY INTERESTS Privity: connection or mutual interest between parties. The term is particularly important in the law of contracts, which requires that there be "privity" if one party to a contract can enforce the contract by a lawsuit against the other party.
THIRD PARTY INTERESTS Thus, a tenant of a buyer of real property cannot sue the former owner (seller) of the property for failure to make repairs guaranteed by the land sales contract between seller and buyer since the tenant was not "in privity" with the seller. http://legal- dictionary.thefreedictionary.com/privity
THIRD PARTY INTERESTS IMPORTANT: The third party benefit must have been intended. There is no right to sue if you are an Incidental Beneficiary (someone who unintentionally derives a benefit from the contract)
THIRD PARTY INTERESTS There are two types of intended beneficiaries Creditors: A party to whom a debt is owed. Donees: A party to whom a gift is given.
THIRD PARTY INTERESTS Does it matter whether an intended beneficiary is a creditor or a donee? Note really. They are both intended.
THIRD PARTY INTERESTS The right to sue as an intended third party beneficiary is still subject to one more issue. The right must be vested.
THIRD PARTY INTERESTS Vested: Having a present right to receive a benefit of the performance when it becomes due. This term is used frequently in many areas of the law. Here it is relatively simple, the 3rd party must have the present right to received the benefit and know of the benefit.
THIRD PARTY INTERESTS In shortAn intended and vested third party beneficiary has the right to sue to enforce a contract
THIRD PARTY INTERESTS Assignment and Delegation It is possible to later alter a contract so that an obligation to be performed, or a benefit to be received, flows to a third party.
THIRD PARTY INTERESTS Assignment: The transfer of the rights to receive a benefit of performance under a contract. You give away your benefit to a third party.
THIRD PARTY INTERESTS Delegation: The transfer of duties/obligations to perform under the contract. You get someone else to perform for you.
THIRD PARTY INTERESTS Assignor/Assignee Obligor Delegant/Delegator Delegate/DelegateeI will not ask you to define these terms on anexam but I may use them in questions so youshould be familiar enough with them tounderstand what I am saying.
THIRD PARTY INTERESTS PRACTICE POINT: You can make a contract non-delegable or non-assignable. It is often desirable to make it non- assignable.
THIRD PARTY INTERESTS EXAMPLES A sublease: Mary is moving for a new job but has a two year lease. She delegates her obligation to pay to someone else in return for possession of the apartment. A mortgage assignment: If or when you own a home, you will find that the bank will “sell” your mortgage to another bank or institution almost immediately and it may get sold several more times. The bank has assigned its right to repayment in exchange for money.
THIRD PARTY INTERESTS KEY DIFFERENCE When you are a delegant/delegator, you are still obligated to perform if the delegate/delegatee does not. When you are an assignor, you effectively “step out” of the contract and no longer have an interest (can’t sue).
THIRD PARTY INTERESTS KEY DIFFERENCE (cont.) Why is that? Because in a delegation, there is still a future promise to perform. In an assignment, there is nothing left for the assignor to get or do. Notice that this is why it may be preferable to restrict the ability to assign whereas restricting delegation is not as important since you get two parties “on the hook” to perform.
THIRD PARTY INTERESTS What you need to know: Definitions Third Party Beneficiary Intended Third Party Beneficiary Vested Assignment v Delegation That an intended and vested third party beneficiary has the right to sue to enforce a contract. The results of assignation vs delegation.
DEFECTS – STATUTE OF FRAUDS As we discussed in the previous class, contracts do not always have to be in writing. They can be verbal They can be implied by facts or actions even But some contracts MUST be in writing otherwise a court will not enforce them
DEFECTS – STATUTE OF FRAUDS The Statute of Frauds is the term we use to describe the rule. It is not actually a statute! Why call it a statute? Old English law passed over the USA via common law even though it was a statute in England.
DEFECTS – STATUTE OF FRAUDS The “rule” was originally evidentiary and had to raised as a defense. Meaning you still had a contract, just no satisfactory way to prove it in court once a defendant showed that the content alleged fell within the rule. Why?
DEFECTS – STATUTE OF FRAUDS Why evidentiary? Why have the rule at all? Contract law likes certainty. In each area (except perhaps the UCC) there is a perceived need to have certainty, or an easy way to provide it.
DEFECTS – STATUTE OF FRAUDS FIVE APPLICATIONS Transfer of Real Property Interests Contracts not performable within one year Contracts in consideration of Marriage Sureties and guarantees (answering the debt of another) Sale of goods over $500
DEFECTS – STATUTE OF FRAUDS Ohio has tinkered with the Statute of frauds R.C. 1335 et. seq. Do not worry about it for this class other that you should be aware of the tinkering if you come across it in practice.
DEFECTS – STATUTE OF FRAUDS Analyzing the statute of frauds is a 3 step process 1. Does the content of the contract fall within the statute? 2. Does the content satisfy the statute (i.e. is it in writing?) 3. Are there any way around the statute in the particular case?
DEFECTS – STATUTE OF FRAUDS A. Transfers of Real Property This is easy if you are just selling a house. But, for those of you who have taken a real property class, you know there are all sorts of interests in real property that may be conveyed. So what qualifies?
DEFECTS – STATUTE OF FRAUDS A. Transfers of Real Property What qualifies Mortgages Leases over 1 year Real estate co-op transfers Easments Lien transfers
DEFECTS – STATUTE OF FRAUDS A. Transfers of Property What does NOT qualify. Factpatterns where a person sells land to perform on a contract that may be performed without the sale (“A agrees to pay “B” $20,000 for tuition. To pay, “A” intends to sell her house.)
DEFECTS – STATUTE OF FRAUDS A. Transfers of Property What does NOT qualify. Contracts to remove something from the land that do not grant an ownership interest in the land. Jane lets ABC company extract oil or harvest tress for a set price.
DEFECTS – STATUTE OF FRAUDS Why have this rule on real property transfersat all?1. Because they are easily recordable.2. The common law obsession with real property and its importance to wealth.
DEFECTS – STATUTE OF FRAUDS B. CONTRACTS OVER 1 YEAR Key: It must be impossible to perform within one year, not just contemplated or unlikely. Practice note: watch for conditions or seemingly ancillary requirements under a contract. Non-compete agreements in an employment contract
DEFECTS – STATUTE OF FRAUDS Why have this part of the rule? Because courts recognized that memories can fade, documents are lost and witnesses disapear. If the parties know it is going to take a long time to perform, they should take adequate precaution.
DEFECTS – STATUTE OF FRAUDS C. Marriage Contracts PrenuptualAgreements Antenuptual Agreements Practice Note: Watch out for sloppy agreements about how people are going to divide money that do not actually reference marriage as the consideration.
DEFECTS – STATUTE OF FRAUDS D. Answering the debt of another This most often arises when people try to administrate the estate of a loved one without legal help. Example: Grandpa dies leaving some estate but a lot of debt. Granddaughter, who wants to bury him properly agrees to pay the debts when the creditors call. Example: Co-signing a loan for junior.
DEFECTS – STATUTE OF FRAUDS E. Sale of Goods Valued over $500 This is a UCC addition and applies to merchants. However, the writing requirement is loosened to include any writing sufficient to to indicate that a contract for sale has been made. A check! Signing a name on a credit card receipt!
DEFECTS – STATUTE OF FRAUDS Way around the statute Performance. If the aggrieved party (1) has performed all or part of its obligation, (2) suffered a detriment, and (3) the performance is unequivocally linked to the contract, then a court may fashion a remedy. The decision to provide a remedy is done on a case by case basis. (Not exactly where you want to be!)
ABSENCE OF A MEETING OF THE MINDS It should seem obvious that a contract must involve a meeting of the minds since every contract needs an offer and acceptance. If you have no agreement, then you have no contract.
ABSENCE OF A MEETING OF THE MINDS This section deals with those situations where one or more parties were mistaken about a material term in the contract Or… Situations where one party was improperly pressured to enter into the contract.
ABSENCE OF A MEETING OF THE MINDS There are five situations where a court will determine that an otherwise valid looking contract in unenforceable for a failure of a meeting of the minds.
ABSENCE OF A MEETING OF THE MINDS 1. Mistake 2. Duress 3. Undue Influence 4. Fraud/Misrepresentation 5. Unconscionability
ABSENCE OF A MEETING OF THE MINDS Mistake: A mistake can be unilateral or mutual. A unilateral mistake: An error made by only one party. A mutual mistake: An error made by both parties.
ABSENCE OF A MEETING OF THE MINDS Unilateral Mistake: Generally not avoidable because they are normally subjective (i.e. the mistaken party’s assertion cannot be verified other than by their own self serving assertion) Contractlaw generally does not fix poor judgment and bad deals.
ABSENCE OF A MEETING OF THE MINDS Unilateral Mistake There are a few circumstances where a court will let a unilateral mistake void a contract. When the mistake is (1) Objectively reasonable and (2) detectable or obvious.
ABSENCE OF A MEETING OF THE MINDS Unilateral Mistake This generally really obvious. Example: Bob submits a construction bid for $200,000. All other bids were for $2,000,000. Bob’s secretary missed a zero. The customer tries to accept Bob’s bid. A court will not enforce this contract.
ABSENCE OF A MEETING OF THE MINDS Unilateral Mistake: Bob’s mistake was objectively reasonable. You can see that it was incorrect without having to “take Bob’s word for it.” Bob’s mistake was also easily detectable, in fact obvious, to the customer. The customer probably acted on the mistake to get an unfair deal.
ABSENCE OF A MEETING OF THE MINDS Unilateral Mistake: Why avoid a unilateral mistake ABSENCE OF A MEETING OF THE MINDS? Because it is about honesty, fair business dealing and good faith.
ABSENCE OF A MEETING OF THE MINDS Unilateral Mistake Ifthe error created a $1.7 million bid because his secretary made a computational error by leaving off the cost of bricks, the court would NOT avoid the contract. Itis not necessarily objectively reasonable AND it is not necessarily detectable (certainly not obvious).
ABSENCE OF A MEETING OF THE MINDS Mutual Mistake: Bothparties do not are mistaken about the subject matter/nature of the contract (even if they are making the same exact mistake)
ABSENCE OF A MEETING OF THE MINDS Mutual Mistake: If there is a mutual mistake, then either party can avoid the contract IF the following apply 1. The mistake relates to a material aspect of the contract. 2. The mistake has a detrimental effect on one or both parties. 3. The mistake could not have been foreseen (i.e. it is a big surprise)
ABSENCE OF A MEETING OF THE MINDS Mutual Mistake NOTE on materiality Book definition of Material: a term is material if it is important to the party’s decision whether or not to enter into the contract.
ABSENCE OF A MEETING OF THE MINDS Mutual Mistake Three general types Mistake on Subject Matter existence Mistake on Ownership Mistake on Subject Matter quality
ABSENCE OF A MEETING OF THE MINDS Mutual Mistake – Mistake of Subject Matter Existence. The goods at issue must exist at the time of entering into the contract. Book example: contract for timber on remote land that already burned down.
ABSENCE OF A MEETING OF THE MINDS Mutual Mistake – Mistake of Ownership The party supplying goods must have the legal title to convey. Bookexample: It turns out that the landowner does not own all or a portion of the land conveyed (mistaken survey).
ABSENCE OF A MEETING OF THE MINDS Mutual Mistake – Mistake of Quality The goods must be of the quality described within the contract. Book Example: the timber on the land is inadequate to build with.
ABSENCE OF A MEETING OF THE MINDS PRACTICE NOTE: If the quality is variable and not described specifically in the contract, then you will not get relief. The other party is going to claim that it is a unilateral mistake. ALSO, if the purchaser had the opportunity to inspect and did not, there may be an assumption of the risk argument.
ABSENCE OF A MEETING OF THE MINDS Mistake Remember: A court remedy for a mutual mistake or unilateral mistake is going to be equitable. They are going to look at fairness and may only avoid or reform portions of the contract. Equitable relief is discretionary and there is great discretion in the remedy.
ABSENCE OF A MEETING OF THE MINDS The next four categories deal, on one level or another, with bad action by one party. While mistake could be “innocent” these defects are not.
ABSENCE OF A MEETING OF THE MINDS Duress: Unreasonable or unscrupulous manipulation of a person to force him to agree to the terms of an agreement he would otherwise not do. Think “threat of harm” PhysicalDuress Mental Duress Economic Duress
ABSENCE OF A MEETING OF THE MINDS Undue Influence: The use of a close personal or fiduciary relationship to a personal advantage to gain assent to terms that the party otherwise would not have agreed to. Think “abuse of trust.”
ABSENCE OF A MEETING OF THE MINDS Fraud and Misrepresentation Bothare similar, however fraud requires intent. Elements 1. A false statement made to the other party 2. regarding a material fact 3. with the intent to deceive (only for fraud) 4. reliance on the statement by the innocent party 5. reliance harms the innocent party
ABSENCE OF A MEETING OF THE MINDS Fraud and Misrepresentation There are some instances where the failure to disclose can constitute misrepresentation or fraud. In some cases there is an affirmative duty to disclose conditions. If there is an affirmative duty to disclose, a failure to do so will be treated as meeting the first element of misrepresentation or fraud.
ABSENCE OF A MEETING OF THE MINDS Fraud and Misrepresentation Notice that a failure to disclose requires some element of knowledge. Failure ot disclose what you don’t know, does not count.
ABSENCE OF A MEETING OF THE MINDS Fraud and Misrepresentation The most common example is a real estate sale. You sell a home, there is a statute requiring you to fill out a residential disclosure form.
ABSENCE OF A MEETING OF THE MINDS Unconscionability Yourbook “punts” on this terms and uses Justice Potter Stewart’s quote on obscenity. “I know it when I see it.”
ABSENCE OF A MEETING OF THE MINDS Unconscionability in Ohio Deutsche Bank Natl. Trust Co. v. Pevarski, ___ N.E.2d ___, 187 Ohio App.3d 455, 2010-Ohio-785. (Ohio App. 2010), ¶¶ 29-32. “generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party” Id. at ¶ 30.
ABSENCE OF A MEETING OF THE MINDS Unconscionability in Ohio “The unconscionability doctrine consists of two prongs: (1) substantive unconscionability, i.e., unfair and unreasonable contract terms, and (2) procedural unconscionability, i.e., individualized circumstances surrounding parties to a contract such that no voluntary meeting of the minds was possible.“ Id. at ¶ 31 (quoting Dorsey v. Contemporary Obstetrics & Gynecology, Inc. (1996), 113 Ohio App.3d 75, 80, 680 N.E.2d 240.
ABSENCE OF A MEETING OF THE MINDS Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 (D.C. Cir. 1965). In this case, the defendant, a retail furniture store, sold multiple items to a customer over the course of several years. The payment plan contract was written so that none of the furniture was considered paid for until all of it was paid for. When the plaintiff failed to make payments on the last furniture item, the furniture store attempted to repossess all of the furniture, not just the last one purchased. The court ruled that the lower court could rule the contract unconscionable and refuse to enforce it, and returned the case to the lower court to decide whether or not the contract was in fact unconscionable
ABSENCE OF A MEETING OF THE MINDS Unconscionability in practice Look for commercially unreasonable terms Provided on a “take it or leave it” basis. To someone under some sort of outside duress Ifit was duress from the offending party then it is a duress issue!
RULES OF CONSTRUCTION Once validity is challenged, we must look at how the courts will interpret the contract. A party asserts one the defects we have talked about and the court has to interpret the contract terms to see if the defect applies. How does it do that?
RULES OF CONSTRUCTION Contracts are supposed to be interpreted by the same set of rules each time in order to provide certainty. For example, you will look to the plain meaning of a term first before apply other rules of interpretation.
RULES OF CONSTRUCTION Four Corners Doctrine: Whenever possible, a court should interpret a contract based upon the terms contained in the contract only. Plain Meaning Rule: terms get their usual and ordinary terms unless redefined specifically. This rule prevents lawyers from overlawyering.
RULES OF CONSTRUCTION Specific language will trump general language. Last in time – First in right: the most current activity or change is the most reflective of the intent of the parties (important in verbal contracts).
RULES OF CONSTRUCTION Ambiguous terms resolved against the drafter as he or she was the party most able to avoid the problem PRACTICE NOTE: Most important in insurance contracts: All insurance contracts are interpreted in favor of the insured if there is vague language. Never take an insurance company’s assertion as to what it meant.
RULES OF CONSTRUCTION A UCC issue Business Custom and Trade Usage A court will look at the following actions outside the four corners of a contract when we are dealing with merchants.
RULES OF CONSTRUCTION Course of Dealing: Actions taken by the parties in performing of similar transactions. Course of Performance: Actions taken by the parties in performing this particular transaction. Usage of Trade: Actions taken generally by similar parties in similar transactions.
RULES OF CONSTRUCTION Why? 1.Repetitive nature of merchant dealings allows for more certainty. 2.Allows for more fluid and faster business transactions.
RULES OF CONSTRUCTION Parol Evidence Rule: The doctrine that excludes certain oral testimony offered as proof of the terms of the contract.
RULES OF CONSTRUCTION Parol Evidence Rule All contradictory evidence is inadmissible. All explanatory evidence is admissible. In simple terms: You can testify as to what a term means but you cannot testify that you came to a different understanding.
RULES OF CONSTRUCTION An issue with complete or incomplete contracts. Some contracts are “open ended”. The parties realize that there are more terms to negotiate. For example: some home construction contracts. A contract can be completely or partially integrated.
RULES OF CONSTRUCTION Complete Integration: All of the contemplated terms of the transaction are included in the contract. Partial Integration: The essential terms are included but not necessarily all.
RULES OF CONSTRUCTION Parol evidence (i.e. supplemental agreements that complete the remaining terms of the contract) is allowed to prove the elements of a contract that is only partially integrated. This makes basic sense. You can provide oral testimony to prove terms that are not contained within a contract that clearly was not intended to include all of the terms.
RULES OF CONSTRUCTION Parol Evidence is also admissible for the following reasons To prove a defect To show a breach The book overly complicates this section by talking about explanatory evidence and technical terms both of which are admissible as explanatory terms already!
RULES OF CONSTRUCTION So if you want the contract to contain all of the terms SAY SO!!! Merger Clause: Language that states that the parties intend to exclude all outside evidence relating to the terms of the contract because all terms are included within the contract. Take the guesswork out of it.
BREACH Book Definition: A party’s performance that deviates from the required performance obligations under the contract. (too wordy)
BREACH Better definition: “[F]ailing to perform any term of a contract, written or oral, without a legitimate legal excuse.” http://legal- dictionary.thefreedictionary.com/breach+of+contract
BREACH This section concerns what happens AFTER we have determined that there is (1) a valid contract, (2) free of defects and (3) without defenses to performance and then a party fails to perform.
BREACH We know from our review of contract formation that performance and payment are not always instantaneous. Contracts may contemplate performance over years.
BREACH So what do you do if one party believes the other is not going to perform its end of the bargain but that performance is not yet required? The party has not yet been harmed.
BREACH Generally, where the harm has not yet occurred, a court will not hear a case because the harm is speculative.
BREACH However, in certain circumstance, and generally confined to contract law, a party can sue for anticipatory breach. Defined: “when a party to a contract repudiates (reneges on) his/her obligations under that contract before fully performing those obligations.” http://legal- dictionary.thefreedictionary.com/anticipatory+breach
BREACH Under what circumstances can a party sue for anticipatory breach? When there is an anticipatory repudiation. Words or actions from a party to a contract that clearly and unequivocally state the intent not to honor its contractual obligations before the time of performance has arrived.
BREACH There are three types of anticipatory repudiation that will give rise to an immediate right to commence a suit for anticipatory breach.
BREACH 1. Unequivocal statement of repudiation. 2. Transfer of interest in the subject matter 3. Affirmative acts that repudiate the contract.
BREACH Do not confuse anticipatory repudiation with a request for a change in the contract terms. Parties often try to modify the contract based upon changing circumstances. This is not a repudiation. Also notice that a request to change AFTER the contract is valid is not the same as a counteroffer.
BREACH The aggrieved party has multiple options. 1. Cancel the contract 2. Ignore the repudiation 3. Sue! Practice note: clients come to law firms thinking they are going to sue someone. They need to carefully consider whether it is worth it. Just because you have an immediate right to sue does not mean that it still will not take 1-2 years and lots of money to win. Perhaps the first two options make more financial sense.
BREACH Just because a term of a contract has been violated (i.e. a breach), does not mean a party will have a successful suit. The breach must be material.
BREACH Book definition of Material revisited: a term is material if it is important to the party’s decision whether or not to enter into the contract.
BREACH The book goes through a bunch of factors regarding what is material. Deprived benefit Adequate compensation Potential to Cure Standards of good faith and fair dealing
BREACH My advice, Try to determine if the breach is trivial and whether there is any amount of actual loss. For example: A contractor finishes a renovation 1 week late but there was no particular reason why the renovation had to be done at a certain time. This is difference than a contractor finishing a project a week late and the homeowner loses the opportunity to sell.
BREACH PRACTICE NOTE: If you want something in a contract to be material, then say it. “Failure to perform [by this date/to these exact specifications/etc.] constitutes a material breach of the terms of this contract.” Remember also, “time is of the essence.”
BREACH Up until now, we have talked about contracts as a single transaction. Many, if not most contract, involve multiple transactions consisting of multiple types of performance and benefits.
BREACH Courts will look to salvage what they can of a contract. If a contract is severable/divisible then a court will compartmentalize the terms and “save” those terms that are unaffected by the breach.
BREACH What if a contractor agrees to renovate a bathroom for $4000 (at cost) along with his renovation of a kitchen for $20,000 ($4000 profit) and then the homeowner decides she does not want the kitchen renovation but wants the bathroom?
BREACH A court will probably not divide this contract because the intended benefit for the contractor would be frustrated. However, do you really want to be in this situation of litigating this?
BREACH The answer: A non-severability clause. Example: “This contract is to be construed as a whole, and all parts of it are to be read and construed together. If any part of this contract shall be adjudged by any court of competent jurisdiction to be invalid, the remainder of this contract shall be invalidated.”
BREACH In other circumstances, you want to keep a contract. For example, if you have an ongoing services contract, you can still maintain the benefits of the contract even if some of you more ancillary terms (arbitration, forum selection, interest rates, etc.) are invalid.
BREACH The answer: A severability clause! “If any portion of this Agreement is found invalid or unenforceable, such decision does not invalidate the remaining provisions of this Agreement unless enforcement would frustrate the Purpose of the Agreement set forth at the outset of this Agreement. If a court determines that a portion of this Agreement could be valid if it was limited, then such provision should be interpreted to be limited as necessary for it to become valid.”
BREACH Similarly to the motivation to have a severable contract, a party may want to waive a breach. Why? Because the party may still receive sufficient benefit to make the partial performance worthwhile.
BREACH The waiver must be knowing and intentional. If it is, then a court will generally determine that the portion of the contracted waived but enforce the rest of the terms as if the offending term did not exist.
EXCUSE Impracticality When there is an unforeseen excessive and unreasonable cost a court may excuse performance Most importantly, fluctuations in prices and finances are not unforeseen. Look for a total surprise. Not that different from a mutual mistake! In fact, both arguments should normally be considered together (two bites at the apple)
EXCUSE Impossibility 3 situations 1. Death of a party 2. Destruction of the subject matter 3. Supervening illegality Sounds a lot like issues discussed for termination of an offer however this situation is after a contract as been formed.
EXCUSE Impossibility Death NOTE: A contract can always specify that the obligations survive the death of a party OR it could specify that the obligation CANNOT.
EXCUSE Impossibility Subject Matter Destruction Notethat the destruction should not be foreseeable Force Majeur
EXCUSE Impossibility Supervening Illegality Remember this from before The subject matter of the contract becomes illegal afterwards. This is similar to the concepts expressed in the termination of offer section but occurs after the contract is entered into.
EXCUSE Frustration of purpose Changes in circumstances surrounding the contract render the performance of the terms useless in relation to the reasons for entering into the contract. Remember: It must not be foreseeable!
EXCUSE Performance Prevented Thisis only an excuse for one party and is the mirror image of a breach/anticipatory repudiation. When one party takes steps to preclude the other party’s performance or prevent its own performance, the innocent party is excused from performing its obligations.
EXCUSE Insolvency If it is clear that a party has no ability to pay its debts, it may declare bankruptcy. Bankruptcy puts all obligation and payments on hold (known as the bankruptcy stay) and may result in termination of those obligations. If the suspension of the obligations and payments amounts to a fofeiture for the innocent party, then the innocent party has an excuse. This is a VERY vague area.
CHANGES BY AGREEMENT We previously talked about requests to change terms in a contract. The freedom to contract necessarily implies that the parties can mutually agree to change or terminate a contract even after it is formed.
CHANGES BY AGREEMENT How? 1. Mutual Rescission - “call it all off” An agreement to terminate the contract and return to the pre-contract status quo
CHANGES BY AGREEMENT How? 2. Release – settlement A discharge from contractual obligations that acknowledges the dispute but foregoes contractual remedies. Normally this involves a payment of money.
CHANGES BY AGREEMENT How? Accord and Satisfaction – modify the 3. agreement to fit the situation at hand. The parties agree not to sue in exchange for accepting the imperfect performance and/or payment.
CHANGES BY AGREEMENT How? Substitute Agreement/novation – 4. replacement contract with new terms This is different than accord and satisfaction. The terms do not fit the situation at hand but contemplate a situation both different from the original contract and the current status.
CHANGES BY AGREEMENT How? 5.Modification – a change or addition to the original contract. This keeps the underlying agreement. It is often the simplest may to fix a problem without re-writing and re-negotiating everything.
COMPENSATORY DAMAGES Contract law provides two types of remedies. 1. Consequential Damages 2. Equity/Quasi Contract remedies
COMPENSATORY DAMAGES Compensatory damages place the non- breaching party in a position where the effect of the breach has been neutralized. They are NOT speculative or punitive. While you may find these damages intertwined in a contract case, those awards are based upon tort or statutory authority.
COMPENSATORY DAMAGES 3 types Expectation: The amount of value expected to be received. (value of the contract) Restitution: The amount of value provided to the breaching party. Reliance: The amount of value to reimburse the innocent party for expenses incurred in preparing to perform.
COMPENSATORY DAMAGES Expectation damages are mutually exclusive to Restitution and Reliance damages. You can however recover both Restitution and Reliance together.
COMPENSATORY DAMAGES Why can’t you get all types of damages? Because it would result in double/triple recovery. If you receive the benefit of the contract (profit) and then get your costs back, then you are ahead of where you would otherwise be.
COMPENSATORY DAMAGES How do you/or a court choose? A. First, which one can you calculate? If you cannot get a calculation on it, you cannot ask for it because it is speculative. B. Which one gets you the most money! Normally, expectation damages if calculable.
COMPENSATORY DAMAGES Example: ABC contracts with XYZ to provide produce and distribute marketing materials for XYZ for $10,000 but fails to distribute the materials to the agreed upon community resulting in a breach by ABC. Expectation damages cannot be calculated because it is not clear how effective the marketing materials would have been. They are speculative.
COMPENSATORY DAMAGES Reverse example: ABC contracts with XYZ to provide produce and distribute marketing materials for XYZ for $10,000. ABC performs on it end of the bargain for a cost of $7000 but XYZ fails to pay. Expectation damages are calculable ($10,000 -$3,000)* and not speculative. *do not use this formula alone to calculate damages as it assumes that certain other factors are not present for the sake of simplicity in explanation. This is meant to show what the expectation damages are, not the ultimate amount recovered as you will see shortly.
COMPENSATORY DAMAGES There are other calculable damage issues. Mitigation Consequential/Incidental damages
COMPENSATORY DAMAGES Mitigation Everyparty is under a duty to mitigate its damages through reasonable efforts. Example: Bob leases an apartment for 1 year at $500 a month to Amy who moves out after 3 months and stops paying. Bob is under a duty to try to release that apartment. If he does so 3 months later, he is only entitled to the 3 months rent in between ($1500).
COMPENSATORY DAMAGES Mitigation Another example: John contract to put a new roof on Amy’s house. After taking off the old roof, John quits breaching the contract. Amy does nothing about the roof issue and a severe storm comes through weeks later leaving interior damage and begins the fostering of mold. Amy still waits a month before getting a new roofer. Amy is under a duty to hire someone to get a new roof on in a reasonable amount of time. John may not be liable for the storm damage and very likely is not liable for the mold.
COMPENSATORY DAMAGES Consequential Damages Damages resulting from the breach that are natural and foreseeable results of the breaching party’s actions. Previous example: Storm damage and mold are consequential damages. Ignore the difference with incidental damages for this class.
COMPENSATORY DAMAGES PRACTICE NOTE: Consequential damages are normally covered by contractor’s general liability policies (because they are accidental) but contractual compensatory damages are almost never covered by a traditional policy. If you want an insurance company to pay and you represent Amy against John, focus on the consequential damages. At the very least, do not forget to inquire about the possibility of their existence.
COMPENSATORY DAMAGES Your book provides a formula for calculating damages. Value + Expenses + Losses – Mitigation – Received Value = Damages V +E+L–M–R=D
COMPENSATORY DAMAGES Previous example ABC contracts with XYZ to provide produce and distribute marketing materials for XYZ for $10,000. ABC performs on it end of the bargain for a cost of $7000 but XYZ fails to pay. $10,000+ $0 + $0 - $0 - $0 = $10,000
COMPENSATORY DAMAGES Previous example made more complicated ABC contracts with XYZ to provide produce and distribute marketing materials for XYZ for $10,000. ABC performs on it end of the but XYZ only pays $5000 because it is dissatisfied with the results (although no guarantees were made). ABC is able to stop production of the materials before the final leaflets are produced saving $1000 in material costs but incurs a charge from the printer of $250. $10,000 + $0 + $250 - $1000 - $5,000 = $4,250
COMPENSATORY DAMAGES Other previous example: Bob leases an apartment for 1 year at $500 a month ($6000 total) to Amy. Amy moves out after 3 months and stops paying. Bob is under a duty to try to re-lease that apartment. He does so 3 months later but only after placing a classified ad in the paper for $50, Hopefully you all instinctively know that he lost three months of rent at $500 a month and then spent an extra $50 for a total loss of $1550. The formula… $6000+ $50 + $0 - $3000 - $1500 = $6050 – 4500 = $1550
COMPENSATORY DAMAGES Owner hires builder to construct a bulding for a total price of $200,000. The estimated total cost of construction is $180,000. The owner breaches by unjustifiably terminating the contract when the work is half completed. At the time of termination, the owner has paid the builder $70,000 for work done, and the builder has spent a total of $95,000 for labor and materials (some of which are incorporated in the partially completed building). After the breach, the builder is able to resell $10,000 of materials purchased for the project.
COMPENSATORY DAMAGES Rose hires Fred under a 2 year employment contract for a salary of $50,000 per year, payable in installments at the end of each month. Six months after Fred starts work, Rose wrongfully discharges her. Fred looks for work for three months but is unable to find a job. Finally, Fred hires an employment agency, paying a one time fee of $1,000. Three months later, she obtains a job similar to the one from which she was fired paying $45,000 per year.
COMPENSATORY DAMAGESDespite all of this, the freedom tocontract, allows the parties to modify even thedamages allowed. Liquidated Damages Limited Damages Attorney’s fees and costs
COMPENSATORY DAMAGES Liquidated Damages Clauses An amount of money agreed upon in the contract as the reasonable estimation of the damages to be recovered. Remember this from torts? Thesecan be advantageous in complicated matters.
COMPENSATORY DAMAGES Limitation of Damages The amount of money agreed upon in the original contract as the maximum recovery allowed for a non-breaching party. Book example: Security alarm failure My example: Your homeowner’s insurance.
COMPENSATORY DAMAGES Attorney’s fees and costs The general rule (the “American Rule) is that each party pays its own attorney’s fees and costs. However, you can provide that a breaching party must reimburse these fees. Practice note: Be careful! Is your client more likely to sue or be sued?
EQUITY AND QUASI CONTRACT What do you due if you cannot calculate damages to an objective certainty? You use equity!
EQUITY AND QUASI CONTRACT At its most basic, equity is a doctrine of fairness and justice. Remember how we have been talking about damages in terms of money for the entire semester? No more
EQUITY AND QUASI CONTRACT Several types of equitable remedies Action Damages Injunctions Specific Performance Court Ordered Solutions DeclaratoryJudgment Recission and Restitution Reformation Quasi Contracts Promissory Estoppel Unjust Enrichment Prevention of equitable remedy – Unclean Hands
EQUITY AND QUASI CONTRACT Injunction: A court order to requires a party to refrain from acting in a particular way. Elements: Irreparableharm Normally have to prove some probability of success on the merits. (not mentioned in the book) Can be both permanent and temporary.
EQUITY AND QUASI CONTRACT Specific Performance: A court order that requires a party to perform a certain act in order to prevent harm to the requesting party. It is often appropriate when value cannot be measured. One of a kind articles. Think “priceless”
EQUITY AND QUASI CONTRACT Declaratory Judgment A court decision allocating rights and responsibilities amongst the parties. Ohio Revised Code 2721 et seq. Used often in insurance contract disputes. “Is this covered?”
EQUITY AND QUASI CONTRACT Rescission and Restitution Very similar to mutual rescission discussed previously. However, there is not mutuality.
EQUITY AND QUASI CONTRACT Reformation Similar to accord and satisfaction. This is difficult because it involves a dispute, or at least non-cooperation, with a court’s attempt to determine that the non-cooperating party did actually agree to a change in the terms. The court does not make a new contract, it is merely the “scrivener” memorializing the reformed contract.
EQUITY AND QUASI CONTRACT Everyone’s favorite … Promissory Estoppel Even when you do not have a valid contract, a court might treat it like one!!! If a party has (1) relied upon a promise of another (2) the promisor knows the promisee will reasonably rely upon the promise and (3) the promisee incurs a substantial detriment as a result of that reliance.
EQUITY AND QUASI CONTRACT Promissory Estoppel The key here is that there is no actual contract because there was no consideration. Stillfairness dictates that a promisor will be held to his or her promise Book example: Renter and her dog.
EQUITY AND QUASI CONTRACT Everyone’s next favorite … Unjust Enrichment A mirror image of Promissory Estoppel The retention by a party of an unearned and undeserved benefit derived from wrongful actions. 1. Promise made 2. Intent to induce reliance 3. Promisee’s actions conferred a benefit on the promisor.
EQUITY AND QUASI CONTRACT Example Subcontractor Bob is installing a roof for contractor Rick. Contractor Rick asks Bob to install some windows. Bob never agrees to a price but figures it will “work its way out”. Rick is paid by the homeowner but never pays Bob for the windows.
UCC There is only so much time in any course Here is what you need to know about the UCC
UCC It deals in transaction in goods with merchants (at least as the seller). It streamlines the process of contract formation by making presumptions based upon normal business dealings
UCC For example Silence can be acceptance Counteroffers and modifications do not terminate offers Commercially fair and reasonable warranties are imposed (remember implied warranties of merchantibility and fitness for a particular purpose?)
COMMON CONTRACTUAL CLAUSES AND THE CONTRACT DRAFTING ASSIGNMENT
DRAFTING ASSIGNMENT Format needs to be clean and readable. There is no magic format that fits all. I have provided several sample contracts of varying worth. If you read them you will see several clauses and language that may be worthwhile.
DRAFTING ASSIGNMENT Common clauses in contracts Severability Arbitration Forum Selection Choice of law Confidentiality They are common because they are useful!
DRAFTING ASSIGNMENT Read the fact pattern What questions do you still have about the facts? I came up with about 14.
DRAFTING ASSIGNMENT1. Do you want an arbitration clause? If so, with who?2. What is the start date of the project?3. What is the end date?4. Is the contract assignable?5. Do you want a forum selection clause?6. Do you want a choice of law clause?7. Should the contract be severable?8. Who provides insurance? What proof is required?9. Is there a liquidated damages clause?10. What is the interest rate for failure to pay?11. When and how is payment due?12. How are you going to deal with changes?13. Is there need for a confidentiality clause?14. Do you want a clause giving the customer the opportunity to negotiate terms of the contract?
DRAFTING ASSIGNMENT It is highly probable that you will start drafting this contract and have more factual questions. In real life, you would simply call the client to get those questions answered. Email me and I will answer those questions and send the answer to the rest of the class as well.
DRAFTING ASSIGNMENT Last week I told you I would give you more time to complete this. I am giving you until the last Friday of exam week. 2 ½ weeks to finish. You are free to turn it in early next week if you like. APRIL 26 AT 5PM BY EMAIL