Contracts: Performance and Discharge

Introduction

How does a party know when his or her obligations under the contract are at an end?

A party may be discharged from a valid contract by:

§ A condition occurring or not occurring.

§ Full performance or material breach by the other party.

§ Agreement of the parties.

§ Operation of law.

Conditions

Possible future event, the occurrence or nonoccurrence of which will trigger the performance of a legal obligation or terminate an existing obligation under a contract.

Types of Conditions:

§ Conditions Precedent.

§ Conditions Subsequent.

§ Conditions Concurrent.

•    Express.

•    Implied in Fact.

•    Implied in Law.

Discharge by Performance

The contract comes to an end when both parties fulfill their respective duties by performing the acts they have promised.

Types of Performance:

§ Complete Performance.

§ Substantial Performance (minor breach).

§ Performance to the Satisfaction of One of the Parties or a Third Party.

Case 16.1: Jacobs & Young v. Kent (1921).

Material Breach of Contract

Breach of Contract - the nonperformance of a contractual duty.

Material breach occurs when there has been a failure of consideration.  Discharges the non breaching party from the contract.

In a non-material breach, the duty to perform is not excused and the non-breaching party must resume performance of the contractual obligations undertaken.

Case 17.2: Van Steenhouse v. Jacor   Broadcasting of Colorado, Inc.  (1998).

Anticipatory Repudiation

If before performance is due, one party refuses to perform his or her contractual obligation.

Results in material breach.

The nonbreaching party should not be required to remain ready and willing to perform when the other party has repudiated the contract.

The nonbreaching party should have the opportunity to seek a similar contract elsewhere.

Time for Performance.

Case 16.3:  Manganaro Corp v. Hitt Contracting Inc.(2002).

Discharge by Agreement

Discharge by Rescission.

Discharge by Novation.

§ Previous Obligation.

§ All parties agree to new contract.

§ Extinguishment of old obligations.

§ New Contract Formed.

Discharge by Substituted Agreement.

Accord and Satisfaction.

Discharge by Operation of Law

ü Alteration of The Contract.

ü Statutes of Limitations.

ü Bankruptcy.

ü  Impossibility or Impracticability. à

Impossibility or Impracticability of Performance

Objective Impossibility of Performance.

§ Death or incapacitation prior to performance;

§ Destruction of the Subject Matter; or

§ Illegality in performance.

Commercial Impracticability.

§  Key: Circumstances not foreseeable.

Case 16.4: Cape-France v. Estate of Peed (2001).

ü Frustration of Purpose.

ü Temporary Impossibility.

Contracts Third Party Rights

Introduction

Only the Parties to a contract have rights and liabilities under the contract.

Exceptions:

§ Assignment or Delegation.

§ Third party beneficiary contract.

Assignments and Delegations

Transfer of contractual rightsis an assignment.

Transfer of contractual dutiesis a delegation.

Assignments

Rights cannot be assigned:

§ If the assignment is contrary to statute.

§ When a contract is personal in nature.

§ Assignment materially changes rights or duties of obligor.

§ If the contract stipulates the right cannot be assigned. Case 15.1: Forest Commodity v. Lone Star (2002).

Valid notice must be given to all parties.

Case 15.2: Gold v. Ziff Communications (2001).

Delegation

Contractual duties in a bilateral contract that are delegated to a 3^rd party.

Duties That Cannot be Delegated

When special trust has been placed on the obligor.

When performance requires personal skill or talents.

When performance will vary materially from obligee expectations.

When the contract expressly prohibits delegation.

Effect of a Delegation

Delegator remains liable.

Delegatee liable if delegation contract creates a third party beneficiary relationship in the obligee.

Assignment of “All Rights”

Assignment of rights and a delegation of duties.

Third Party Beneficiaries

Original parties to the contract intend at the time of contracting that the contract performance directly benefits a third person.

Types of Intended Beneficiaries

ü Creditor Beneficiaries.

ü Donee Beneficiaries.

ü Modern View:  Does not draw such clear lines and distinguishes only between intended beneficiaries and incidental beneficiaries.

The Vesting of an Intended Beneficiary’s Rights

For third party beneficiary contract to be effective, rights under the contract must vest:

§ Third party’s manifesting assent to the contract.

§ Third party’s materially altering position in detrimental reliance on the contract.

Intended v. Incidental Beneficiaries

Intended:

Promisee intended to confer on the beneficiary the right to bring suit to enforce the contract.

Factors:

•    Performance is rendered directly to 3rd party.

•    3rd party’s right to control contract details.

•    3rd party expressly designated as beneficiary.

Incidental.

§ Contract between two parties is unintentional.

§ Incidental beneficiary cannot sue to enforce the contract.

Case 15.3: Vogan v. Hayes Appraisal Associates, Inc. (1999).

Contracts: Statute of Frauds

Origins of the Statute of Frauds

1677 England passed the law “An Act for the Prevention of Frauds and Abuses.”

Certain types of contracts must be in writing and signed by the party against whom enforcement is sought to be enforceable.

Today, almost every state has a Statute of Frauds.

The Statute of Frauds

To be enforceable, the following types of contracts must be in writing and signed:

§ Contracts involving interest in land.

§ Contracts involving “One Year Rule.”

§ Collateral or Secondary Contracts.

§ Promise made in consideration of marriage.

§ Contracts for the sale of goods priced at $500 or more.

Contracts Involving Interests in Land

Land includes all physical objects that are permanently attached to the soil: buildings, fences, trees, and the soil itself.

All contracts for the transfer of other interest in land: mortgages and leases.

Case 14.1: Michel v. Bush (2001).

The One-Year Rule

A contract that cannot, by its own terms, be performed within one year from the date it was formed must be in writing to be enforceable.

One-year period begins to run the day after the contract is made.

§ Test:  Whether performance is possible (although unlikely) within one year.

Collateral Promises

Primary v. Secondary Obligations.

“Main Purpose Rule” Exception .

Estate Debts.

Promises Made in Consideration of Marriage

Prenuptial agreements must be in writing and signed to be enforceable.

Contracts must be supported by some consideration to be enforceable.

Prenuptial agreements may not be enforceable if the agreement is not voluntary.

Contracts for the Sale of Goods

UCC requires a writing or memorandum for the sale of goods priced at $500 or more. Exceptions:

§ Partial Performance.

§ Admissions.

§ Promissory Estoppel.

§ Special Exceptions under the UCC.

Sufficiency of the Writing

Under the Statue of Frauds.

§ Must name, identify subject matter, consideration, other essential terms, and must be signed by the the party against whom enforcement is sought.

Under the UCC.

§ Need only name the quantity term and be signed by the party to be charged.

Case 14.3: Interstate Litho Corp. v. Brown (2001)

Parol Evidence Rule

Oral representations or promises made prior to the contract’s formation or at the time the contract was created, may not be admitted in court.

Integrated Contracts.

Exceptions to the Parol Evidence Rule

ü   Contracts subsequently modified.

ü   Voidable or Void contracts.

ü   Contracts containing ambiguous terms.

ü   Prior dealing, course of performance, or usage of trade.

ü   Exceptions to the Parol Evidence Rule

ü   Contracts subject to orally agreed-on conditions.

ü   Contracts with an obvious or gross clerical error that clearly would not represent the agreement of the parties. 

Case 14.4: Cousins Sub Systems v. McKinney (1999).

Contracts: Genuineness of Assent

Introduction

Contract may be unenforceable if the parties have not genuinely assented to its terms by:

§ Mistake.

§ Misrepresentation.

§ Undue Influence.

§ Duress.

Mistakes of Fact

Only a Mistake of Factallows a contract to be canceled.

Bilateral (Mutual) Mistakes can be rescinded by either party.

Unilateral Mistakes cannot be canceled unless:

If other party to the contract knows or should have known that a mistake of fact was made.

If mistake was due to mathematical mistake in addition, summation, subtraction, division, or multiplication and was made inadvertently and without gross negligence.

Mistakes of Value

Generally, contract is enforceable by either party.

Exception: Mistake of value because of a mistake of material fact.

Fraudulent Misrepresentation

Contract Voidable by Innocent Party.

Elements:

Misrepresentation of Material Fact.

Intent to Deceive.

Reliance on Misrepresentation.

Injury to the Innocent Party.

Misrepresentation Has Occurred

Misrepresentation can be express or implied.

§ Concealment.

§ Misrepresentation of future facts and statements of opinion are not fraud, unless person professes to be an expert.

§ Misrepresentation of Law is not fraud, unless person has greater knowledge of the law.

§ Silence is not fraud, unless serious problem or defect known or asked and person lied.

Case 13.1: Vokes v. Arthur Murray Inc. (1968).

Intent to Deceive

Scienter is an Intent to Deceive.

§ Party knowledge that fact is not as stated.

§ Party makes a reckless statement with disregard of the truth.

§ Party implies that statement is based on personal knowledge or investigation.

Gross negligence is considered intent.

Case 13.2: Sarvis v. Vermont State Colleges (2001).

Reliance on Misrepresentation

Deceived party must have Justifiable Reliance.

§ Depends on the knowledge and experience of the party relying

Case 13.3:  Folet v. Parlier (2002).

Injury to the Innocent Party

No proof of injury is required when the action is to rescind contract.

Proof of injury is universally required to recover damages.

Nonfraudulent Misrepresentation

Innocent Misrepresentation.

Negligent Misrepresentation.

§ Equal to Scienter.

§ Is treated as fraudulent misrepresentation, even though the misrepresentation was not purposeful.

Undue Influence

Contract is Voidable.

§ Confidential or Fiduciary Relationship.

§ Relationship of dependence.

§ Influence or Persuasion.

§ Weak party talked into doing something not beneficial to him or herself.

Presumption of Undue Influence.

Duress

Forcing a party to enter into a contract under fear or threat makes the contract voidable.

Threatened act must be wrongful or illegal.

Improper Threat.

§ Threat to exercise legal rights (criminal or civil suit).

§ Economic or physical.

Adhesion contracts and Unconscionability

Adhesion Contracts.

Preprinted contract in which the adhering party has no opportunity to negotiate the terms of the contract.

Unconscionability.

One sided bargains in which one party has substantially superior bargaining power and can dictate the terms of the contract.

•    “Standard-form.”

•    “Take-it-or-leave-it” adhesion contracts.

Contracts: Capacity and Legality

Contractual Capacity

The legal ability to enter into a contractual relationship.

•    Full competence.

•    No competence.

•    Limited competence.

Legality.

§ The agreement must not call for the performance of any act that is criminal, tortious, or otherwise opposed to public policy.

Minors

In most states, a person is no longer a minor for contractual purposes at the age 18.

A minor can enter into any contract that an adult can.

A contract entered into by a minor is voidable at the option of that minor.

Minor’s Right to Disaffirm

A contract can be disaffirmed at any time during minority or for a reasonable period after the minor comes of age.

Minor must disaffirm the entire contract.

Disaffirmance can be expressed or implied.

Minor’s Obligation on Disaffirmance

In most states, minor need only return the the goods (or other consideration) subject to the contract, provide the goods are in the minor’s possession or control.

In increasing number of states, the minor must restore the adult to the position held before the contract was made.

Case 12.1: Dodson v. Shrader (1992).

Exceptions to Minor’s Right to Disaffirm

Misrepresentation of Age. 

§ Generally, minor can disaffirm the contract.

§ But some states prohibit disaffirmance and hold the minor liable.

Contracts for Necessaries.

§ Contracts for food, clothing, shelter may be disaffirmed by minor is liable for reasonable value of goods or services.

Insurance.

§  Not viewed as necessaries, so minor can disaffirm contract and recover all premiums paid.

Loans.

§ Seldom considered to be necessaries.

§ Exception:

•    Loan to a minor for the express purpose of enabling the minor to purchase necessaries.

Ratification

Minor, or after reaching majority, indicates (expressly or impliedly) an intention to become bound by a contract made as a minor.

Executed v. Executory contracts.

Parent’s Liability

Contracts.

§ Parents not liable (This is why parents are usually required to sign any contract made with a minor).

Torts (Statutes Vary):

§ Minors are personally liable for their own torts.

§ Liability imposed on parents only for willful acts of their minor children.

§ Liability imposed on parents for their children negligent acts that result from their parents’ negligence.

Intoxication

Lack of contractual capacity at the time the contract is being made.

Contract can be either voidable or valid.

§ Courts look at objective indications to determine if contract is voidable.

If voidable:

§ Person has the option to disaffirm, or

§ Person may ratify the contract expressly or impliedly.

Mentally Incompetent Persons

Void.

§ If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed.

Voidable.

§ If the person does not know he or she is entering into the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences.

Valid.

§ If person is able to understand the nature and effect of entering into a contract yet lack capacity to engage in other activities.

§ Lucid Interval.

Legality

A contract to do something prohibited by federal or state statutory law is illegal and therefore void (never existed).

§ Contract that calls for for a tortious act.

§ Contract that calls for an act contrary to public policy.

Contracts Contrary to Statute

ü Usury.

ü Gambling.

ü Sabbath Laws.

ü Licensing Statutes.

Case 12.2:  RCDI Construction v. Spaceplan (2001).

ü Contracts to Commit a Crime.

Contracts Contrary to Public Policy

Contracts contrary to public policy are void.

Unconscionable Contracts or Clauses.

Procedural or Substantive Unconscionability.

Exculpatory Clauses.

Discriminatory Contracts.

Contracts for the Commission of a Tort.

Contracts in Restraint of Trade

Anti-Competitive Agreements are void.

•    Exception: Covenant not to Compete and Sale of Business.

•    Exception: Covenant not to Compete in Employment.

Unconscionable Contracts/Clauses.

§ Exculpatory clauses.

Case 12.4:  Beaver v. Grand Prix Karting (2001).

Exceptions to the General Rule

ü Justifiable Ignorance of the Facts.

ü Members of Protected Classes.

ü Withdrawal from an Illegal Agreement.

ü Contract Illegal through Fraud, Duress, or Undue Influence.

ü Severable or Divisible Contracts.

Contracts: Consideration

Introduction

Consideration is legal value given in return for a promise or performance.

§   Must have something of legal value or sufficiency.

§   Must be a bargained-for exchange.

Elements of Consideration

Consideration for a promise must be either:

§   Legally detrimental to the promisee, or legally beneficial to the promisor.

“Legal Value”:

§   Promise,

§   Performance, or

§   Forbearance.

Case 11.1: Hamer v. Sidway (1891).

Adequacy of Consideration

A Court will not question the fairness of the bargain if legally sufficient.

§   Law does not protect a person for entering into an unwise contract.

§   In extreme cases, a court may find that a party lacks legal capacity or that contract was unconscionable.

Case 11.2: Powell v. MVE Holdings (2001).

Agreements That Lack Consideration

Preexisting Duty.

§   Promise to to what one already has a legal duty to do does not constitute legally sufficient consideration.

§   Exceptions:

•          Unforeseen Difficulties.

•          Recession and New Contract.

Past Consideration is no consideration because the bargained-for exchange element is missing.

Problem Areas Concerning Consideration

ü   Uncertain Performance.

ü   Settlement of Claims.

ü   Promises enforceable without consideration.

ü   Uncertain Performance

ü    Illusory Promises.

§   Promisor has not definitely promised to do anything (no promise at all).

ü   Option-to-Cancel Clauses.

ü   Requirements and Output Contracts.

Settlement of Claims

Debtor offers to pay a lesser amount than the creditor purports to be owed.

Accord and Satisfaction.

Liquidated Debt.

Ø  Amount has been ascertained, fixed, agreed on, settled, or exactly determined.

Unliquidated Debt.

Ø  Parties give up legal right to contest the amount in dispute, and thus consideration is given.

Release bars any further recovery beyond the terms stated in the release.

Case 11.3: Mills v. Berlex Laboratories (1999).

Convenant not to Sue is an agreement to substitute contractual obligation for some other type of legal action based on a valid claim.

Promises Enforceable Without Consideration

Promises to Pay Debt Barred by a Statue of Limitations.

Detrimental Reliance and Promissory Estoppel:

§   Must be definite promise.

§   Promisee must justifiably rely on the promise.

§   Reliance is substantial.

§   Justice will be served by enforcing promise.