Term
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Definition
Contract discharge refers to the termination of one’s obligation under the contract – the point at which the parties no longer owe each other duties.
The first question, therefore, is whether each of the parties actually incurred an obligation to perform. In most contracts, promises to perform are absolute – they are not conditioned upon anything. Sometimes, however, promises are conditioned upon the occurrence of some event. We call such an event a condition, and it may prevent the contractual obligation from ever arising.
There are three types of conditions: (1) conditions precedent (2) conditions subsequent and (3) concurrent conditions. |
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Term
| three types of conditions for contract |
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Definition
| (1) conditions precedent (2) conditions subsequent and (3) concurrent conditions. |
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Term
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Definition
A condition precedent is one that must be fulfilled in order for the contracting party’s obligation to become absolute.
The best example of a condition precedent is an insurance contract’s requirement that the insured pass a physical exam prior to coverage taking effect.
In other words, the insurance company does not incur any obligation at all unless this condition precedent has been met. |
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Term
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Definition
A condition that, if not fully performed, terminates a party’s absolute duty to perform.
The best example of this is where an employer requires its employees to maintain a professional license (HCC requires me to maintain my license to practice law).
If the condition is not met, the party’s absolute duty to perform is terminated. |
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Term
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Definition
| This refers to mutually dependent conditions which must be performed at the same time. The best example is a buyer agreeing to buy goods if the seller delivers the goods. Neither party has an absolute duty to perform unless and until the other party satisfies the condition of the contract. |
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Term
| There are three ways that discharge will occur: |
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Definition
(1) By Performance
(2) By Agreement of the Parties
(3) By Operation of Law. |
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Term
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Definition
This is the most typical method of obtaining discharge – the parties perform their duties under the contract.
Tender of performance qualifies as performance as well. In other words, the party is ready, willing and able to perform under the contract (a seller delivering goods can demand payment).
If performance or tender of performance has occurred and the other party refuses to satisfy his/her obligation to perform, that party has breached the contract. |
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Term
| Complete Performance v. Substantial Performance |
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Definition
Ordinarily only complete performance will discharge one’s obligations under a contract. Sometimes, however, a party will render substantial performance, and that substantial performance will discharge his/her contractual obligations.
In order to qualify as substantial performance, the performance must create substantially same benefits as those promised in the contract.
If substantial performance is found, the other party’s duty to perform remains absolute, although he/she can deduct damages resulting from the incomplete performance. |
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Term
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Definition
In order to relieve a non-breaching party to a contract from his/her duty to perform under the contract, a breach must be material. A non-material breach is nonetheless a breach, but does not relieve the non-breaching party of his/her duty under the contract. Rather, a non-material breach merely entitles the non-breaching party to sue for damages.
The underlying policy here is that we want parties to go forward with their contracts where there are only minor problems. |
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Term
| Anticipatory Breach of Contract |
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Definition
A statement or action by a party to a contract that he/she will not perform under the contract is known as anticipatory repudiation. Anticipatory repudiation is treated as a material breach, relieving the non-breaching party of all obligations under the contract.
The most common example of anticipatory repudiation occurs where there are market fluctuations which would make performance of a contract extremely unfavorable to one of the parties. |
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Term
| Discharge by Agreement of the Parties |
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Definition
Three ways:
Rescission
Novation
Accord and Satisfaction |
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Term
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Definition
Rescission occurs where the parties agree to cancel the contract and restore themselves to their original positions.
Rescission must satisfy the original elements of a contract – offer, acceptance and consideration. In essence, it is a new contract which cancels the old one. |
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Term
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Definition
| The substitution, by agreement of the parties, of a new contract for an old contract in order to substitute a third party for one of the original parties to the contract. |
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Term
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Definition
| In an accord and satisfaction, the parties agree to accept performance which is different from that originally promised. An accord and satisfaction discharges the original contractual obligation. |
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Term
| Discharge by Operation of Law |
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Definition
| A contractual obligation may be discharged by operation of law in the following circumstances: (1) Material Alteration of the Contract (2) Statute of Limitations has expired (3) Bankruptcy (4) Impossibility of Performance. |
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Term
| Material Alteration of the Contract |
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Definition
| Where one party to a written contract materially alters the terms of the contract without the consent of the other party (changes a quantity term, e.g.), the non-altering party may treat the alteration as a discharge of his/her obligations under the contract. |
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Term
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Definition
| Once the statute of limitations has passed for bringing an action on the contract, the parties to the contract are discharged in the sense that they can incur no liability for failure to perform. |
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Term
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Definition
| Once a person or company files for bankruptcy, a bankruptcy court will allocate assets of the debtor – the debtor receives a discharge in bankruptcy. |
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Term
| Impossibility of Performance |
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Definition
| This is a doctrine under which a party to a contract is relieved of his/her duty to perform when performance becomes objectively impossible or totally impracticable through no fault of either party. |
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Term
| Objective Impossibility – Four Types |
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Definition
It cannot be done.
“It is impossible for anyone to perform” not “It is impossible for me to perform.”
(1) A Party whose Performance is Essential to the Contract Dies or becomes Incapacitated
(2) The Subject Matter of the Contract is Destroyed
(3) Supervening Illegality
(4) Commercial Impracticability (originally contemplated performance turns out to be significantly more burdensome than planned – will cost 10 times as much money, eg.) |
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Term
| What about temporary impossibility? |
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Definition
| The contractual obligation is discharged, but kicks in again as soon as the temporary condition has lifted. |
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Term
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Definition
| a legally binding promise |
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Term
| Contract law reflects the values that we as a society deem important |
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Definition
| Only certain types of promises are legally binding. Society allows contracts to be broken for certain reasons. Society also says that in some situations, such as when the contract was made by a child or a mentally incompetent person, it should not be enforced. If the contract was made on the basis of false information, it may not be enforceable as well. |
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Term
| There are two primary sources of contract law |
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Definition
| the common law and the Uniform Commercial Code (UCC). The UCC governs contracts for the sale of goods and other contracts involving financial instruments such as letters of credit, checks and loans. |
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Term
| Two primary questions for any contract analysis: |
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Definition
(1) DO WE HAVE AN ENFORCEABLE CONTRACT? If yes,
(2) DID THE PATIES RECIVE A DISCHARGE OF THEIR OBLIGATION OR WAS THERE A BREACH OF THE CONTRACT? |
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Term
| DO WE HAVE AN ENFORCEABLE CONTRACT? |
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Definition
OFFER
+ ACCEPTANCE
+ CONSIDERATION
+ NO VALID DEFENSES
= ENFORCEABLE CONTRACT |
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Term
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Definition
Elements of a Valid Offer:
(1) A promise/commitment
(2) communicated to an identified person (offeree)
(3) containing sufficiently definite terms. |
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Term
| A promise/commitment means |
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Definition
Offeror must promise to do something or refrain from doing something in the future.
Objective Standard of Intent to Commit
We judge whether the offeror has made a promise/commitment by an objective standard – in other words “what would a reasonable person in the position of the offeree have assumed the offeror’s words and actions meant”?
For example, suppose I am teaching a class and my marker runs out of ink. In my frustration, I declare “I will give a million dollars to anyone who will get me a new marker!” A reasonable person would know I do not seriously intend to shell out a million dollars for a marker. Hence, there is no objective intent to commit to the promise. |
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Term
| Expression of Opinion – Not an offer |
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Definition
Not evidence of an intention to enter a binding agreement.
Eg – Doctor tells you that you will be better in a day or two, and you are still sick three weeks later. You cannot sue for breach of contract – the doctor did not express a binding promise. |
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Term
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Definition
“I plan to sell my minivan for $10,000.”
Not a promise to sell the van – just a statement of intent. |
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Term
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Definition
Invitation to Submit Bids – Government Contracts
“I wouldn’t sell my minivan for less than $10,000” – Not an offer to sell for $10,000.
“Would you be interested in selling your minivan to me?” Not an offer to buy the minivan. |
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Term
| Advertisements/Catalogs/Circulars |
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Definition
Let’s say I put an ad in the paper for my minivan for $10,000. Ten people call me to accept. If the ad was an offer, I would wind up with a binding contract with each of those ten people.
Due to the problem of multiple acceptances, advertisements are not offers. Rather, they are invitations to make an offer.
However, if an advertisement is clear, definite, and identifies the offeree, it may be considered an offer if it says “first come, first served,” which eliminates the problem of multiple acceptances.
“First 100 minivans to be sold for $10,000 – First come, first served.” This might be construed as an offer.
“One winter coat, normally valued at $200, for $50, first come, first served. Cash only.” |
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Term
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Definition
| “$100 to anyone with information leading to my lost dog, Fluffy.” Courts have construed this to be an offer – but it may only be accepted by one person. |
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Term
| Communicated to an Identified Offeree |
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Definition
The offeree has to know of the offer.
Let’s say the police question relative to a murder investigation, and I tell them my neighbor did it. Later that day, I learn there is a $10,000 reward for information leading to the arrest of the killer. Did my telling the police constitute an acceptance of the offer? No – the offer can be accepted only by someone who knows of the offer. I did not know of the offer at the time I gave the information to the police.
If the offeree is identified in the offer, only that offeree may accept the offer. Suppose I send a fax stating “Susan, I will sell you my minivan for $10,000. Please let me know by Friday if you want it.” Only Susan can respond to this. Her roommate cannot intercept the fax and accept my offer.
If the offer does not designate a specific offeree, we can assume it is made to the general public. That is fine. |
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Term
| Containing Sufficiently Definite Terms |
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Definition
An offer must have reasonably definite terms.
The really important terms must be stated:
The parties (offeror and offeree)
The subject matter or nature of the performance due
The price
The quantity of items sold
The time for performance –if silent, we can assume reasonable time |
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Term
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Definition
When a valid offer is communicated to an offeree, the offeree then has the power to transform the offer into a binding commitment.
This is called the power of acceptance. The power of acceptance does not last forever. It can be terminated by the parties or by operation of law. |
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Term
| Termination by the Parties |
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Definition
| This can be done in one of three ways: revocation, rejection or counteroffer. |
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Term
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Definition
The offerors’ act of withdrawing the offer.
As long as the offer has not been communicated to the offeree or the offeree has not accepted the offer, the offeror may terminate/revoke the offer. The revocation must be communicated to the offeree before the offeree accepts.
Revocation can be express (“I revoke my offer to sell you my minivan”) or implied (I sell my minivan to someone else prior to acceptance by the offeree).
A revocation becomes effective upon receipt by the offeree. A letter revoking an offer which is mailed on April 1 but not received by the offeree until April 3 is effective April 3. |
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Term
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Definition
Most offers are revocable. Some, however, are irrevocable.
An example of an irrevocable contract is an option contract. An option contract is a contract under which the offeror cannot revoke his offer for a stipulated time period, and the oferee can accept or reject during this time period without fear that the offer will be made to another person. The offeree generally will be paid in some way for extending the option. |
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Term
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Definition
| Two things constitute a rejection – a refusal and a counter-offer. |
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Term
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Definition
Refers to words or conduct that indicate that the offer is not accepted.
“I’ll sell you my minivan for $10,000.” = Offer
“No way! That’s way out of my price range.” = Rejection |
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Term
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Definition
An acceptance which is conditional upon additional terms = counteroffer.
A counteroffer acts as a simultaneous rejection (refusal) and offer. The original offeror now has the power to accept or reject the new offer.
Again, this is all so important because we need to know when the contract has been formed – that is the only way to determine who owes who what.
Rejections (refusals or counteroffers) are effective upon receipt by the offeror.
Suppose I send Susan an offer to sell my house. If Susan sends a letter refusing the offer, the offer remains open until I receive the refusal. If Susan changes her mind and faxes an acceptance before the letter is received, a contract has been formed, and both parties are bound. |
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Term
| Termination by Operation of Law: |
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Definition
Death or Incapacity of Offeror or Offeree
Supervening Illegality
Destruction of the Subject Matter of the Contract |
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Term
| Death or Incapacity of Offeror or Offeree |
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Definition
| If either parties dies prior to the formation of the contract, the power of acceptance is terminated. |
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Term
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Definition
If, after the offer is made but prior to acceptance of the offer, the proposed contract becomes illegal, the power of acceptance is terminated.
Suppose People’s Bank offers me a car loan at 12% interest. The next day, Congress passes a law limiting the amount of interest that can be charged on car loans to 11%. This “supervening illegality” would terminate the power of acceptance. No contract can come into existence. |
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Term
| Destruction of the Subject Matter of the Contract |
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Definition
The destruction of a person or thing essential to
The contract terminates the power of acceptance.
Suppose I offer to sell my minivan for $10,000. Prior to acceptance, it is struck by a meteorite and destroyed. The power of acceptance is terminated. |
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Term
| Elements of a valid acceptance: |
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Definition
(1) Words or conduct by the offeree
(2) Showing unequivocal agreement to the terms of the offer
(3) Communicated to the offeror. |
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Term
| Words or conduct by the offeree |
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Definition
Only the offeree (or his authorized agent) can accept the offer.
What about silence? Does silence qualify as “words or conduct”?
The general rule is that silence does not constitute acceptance.
There is an exception to the rule, however, where there is a duty to speak.
A duty to speak may arise where the offeree accepts the benefits of the offer, knowing they were given/performed with an expectation of payment, and the offeree had an opportunity to reject the performance.
Suppose a contractor arrives at my house and begins to paint the house. I say nothing. I know he has mistaken my house for my neighbor’s house. Still, I say nothing. When he is finished, he comes to the door asking for payment. I say, “but I never accepted your offer!” No – the law says I had a duty to reject the offer in this case. My silence = acceptance of the offer.
In addition, prior dealings may make silence an acceptance. If a merchant routinely notifies a seller of defective goods when shipments arrive, it is reasonable for the seller to assume that the merchant’s silence means the goods are accepted. |
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Term
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Definition
“The Mirror Image Rule”
The terms of an offeree’s acceptance must adhere exactly to the terms of the offer in order for a contract to be formed.
In other words, if the acceptance is subject to new conditions, or if the terms of acceptance materially alter the original offer, the acceptance will be deemed a counteroffer (which constitutes a rejection of the offer).
“I will sell you my minivan for $10,000.”
“I accept. Please send written contract.” = Valid acceptance
“I will sell you my minivan for $10,000.”
“I accept if you send a written contract.”
No valid acceptance. The word “if” is a new condition contained in the acceptance, which violates the mirror image rule. |
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Term
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Definition
A contract is formed when the acceptance is dispatched (sent) by authorized means to the offeror.
There are two primary considerations here:
The acceptance must be communicated in an acceptable mode and the acceptance must be timely. |
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Term
| Mode of Acceptance – Authorized Means |
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Definition
The acceptance must be made by authorized means. Authorized means can be express or implied. Express authorized means will be stated in the offer (“please respond to this offer by first-class mail or express delivery”).
However, most offers don’t include an expressly authorized mode of acceptance. The following implied methods of acceptance are recognized:
1. The same means used by the offeror to communicate the offer (verbal-verbal; fax-fax; newspaper-newspaper, etc…)
2. Mailing |
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Term
| Dispatched (Sent) to Offeror |
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Definition
Unlike a revocation or rejection, which is effective when received by the offeror, an acceptance is effective when dispatched (sent) to the offeror.
This is known as the “Mailbox Rule.”
Acceptance takes effect, thus completing formation of the contract, at the time the offeree sends or delivers the acceptance to the offeror.
If the acceptance is made by mail, it is effective when the letter is dropped into the post box – not when received. This is true even if the letter is never received by the offeror.
The acceptance must be properly dispatched – correct address, proper postage. If not, it is not effective until received by the offeror.
What if the acceptance is sent by an unauthorized means? Again, it is not effective until received by the offeror.
Remember also that the offeror is the master of his own offer – the offeror can specify that acceptance is not effective until received.
What if the offeree sends a rejection, followed by an acceptance? The law says the first to be received will be effective. |
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Term
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Definition
Defined: the value given for a promise.
Consideration is also known as legal detriment. It is the inducement to enter the contract – the cause, motive, price or compelling reason that the contracting party entered the contract.
Two elements:
(1) Something of legally sufficient value was exchanged for the promise and
(2) The exchange was bargained-for. |
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Term
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Definition
1 promise to do something one has no legal obligation to do (promise to pay money, eg.)
2 perform an act one is not otherwise obligated to do (perform legal services, eg)
3 refrain from an act one is legally free to do.
What we need to look for here is benefit to the promisor or detriment to the promisee. |
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Term
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Definition
The consideration (detriment or benefit) must be the basis for the bargain struck by the parties.
This element of consideration distinguishes contracts from gifts.
Note: Courts do not question the adequacy of consideration. |
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Term
| Contracts that Lack Consideration |
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Definition
1 Preexisting Duty
A promise to do what one is already obligated to do does not constitute sufficient consideration
Modification – (a) Contractor demanding additional funds in the middle of a project (b) landlord agrees to reduce rent by $100 per month.
(But, if tenant agrees to pay one day earlier each month, there would be additional consideration to support the new promise)
Public Duty – (a) Police Chief collecting reward for capturing a criminal (b) firefighter promises to protect her neighbor’s home for a fee of $100 per month.
Courts occasionally allow exceptions to this rule in case where unforeseen difficulties and demands additional funds, the consideration element is nonetheless satisfied.
What the parties can elect to do, however, is rescind the existing contract and form a new contract (supported by new consideration)
2. Past Consideration
Suppose I perform legal services for someone who cannot afford to pay me. A year later, when they have some money, that person sends me a check for $1,000 to pay for the legal services I have already provided. No valid contract here – the consideration did not induce my promise to provide legal services.
The element of bargained-for-exchange is missing.
1. Illusory Promises
Where the terms of the contract are so uncertain that the promisor has not in fact definitely promised to do anything, the promise is illusory, and unenforceable. |
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Term
| Consideration Substitutes |
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Definition
1. Accord and Satisfaction
A common means of settling a claim where the amount of money owed is in dispute.
Check for $100 to seller where seller believes he is owed $150. Drawer of check writes “in full satisfaction” in memo portion of the check. If seller deposits check, an accord and satisfaction have occurred.
Unliquidated debts only!
Liquidated debt – amount is not in dispute (most bank loans)
Unliquidated debt – amount owed is unclear.
2. Promissory Estoppel
A doctrine which applies when someone relies on a promise. Even though the promise is not supported by adequate consideration, it may nonetheless be enforceable under the doctrine of promissory estoppel. |
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Term
| Three elements of promissory estoppel: |
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Definition
1 a clear promise
2 promisee’s justifiable and substantial reliance on the promise
3 justice will be served by enforcing the promise |
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Term
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Definition
Assuming we have offer, acceptance and consideration, the next component to our “formula for an enforceable contract” is that no valid defense to the contract exists.
For our purpose, the defenses to contract formation can be categorized using the acronym CALF (Capacity, Assent, Legality, Form). |
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Term
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Definition
Not every person has the ability to assume binding contractual obligations – some people lack the necessary mental capacity to contract.
Three types of incapacity impact an individual’s ability, or capacity, to enter a contract – (1) age (minority), (2) intoxication and (3) mental incompetence.
Age/Minority (Voidable)
The age of majority in the United States is 18.
A person who has not reached the age of majority is called a minor.
General Rule: Other than contracts for the sale of necessaries, contracts entered into by a minor are voidable at the option of the minor.
In other words, in all other cases, the minor is free to “disaffirm” the contract.
Disaffirmance is the setting aside, or avoidance, of a contractual obligation. This power to disaffirm rests with the minor, not the adult with whom the minor has contracted.
Disaffirmance must be timely – it must be made while still a minor or shortly after turning 18. Waiting two years after you have turned 18 to disaffirm a contract, for example, would not be timely. Another way of saying this would be that failing to disaffirm shortly after reaching the age of majority would constitute an affirmance (or ratification) of the contract.
In order to disaffirm a contract involve the sale of property, the minor must return (make restitution of) any benefits of the contract. In most states, the minor is not liable for any wreckage to the property. With regard to services, there obviously is nothing to return.
Note: It does not matter if the minor lies about his/her age when forming the contract – the subjective knowledge of the adult party to the contract is irrelevant – the minor is still free to disaffirm. Some states have done away with this rule by statute. Others allow recovery by the adult in a suit for fraud/misrepresentation.
Sale of “Necessaries” = food, shelter, clothing, medical attention. A minor remains liable for the reasonable value of necessaries obtained through contract.
In order to qualify as a necessary, the item contracted for must (1) be necessary to the minor’s existence, (2) the value of the item may be up to the standard of living or financial status of the minor and (3) the minor must not be under the care of a parent or guardian who is obligated to provide the item.
If those three criteria are met, the minor may disaffirm the contract without being liable for the reasonable value of the goods or services.
Insurance? No, not a necessary. The minor can disaffirm and recover all premiums paid.
Loans? No, not a necessary, even if the money is spent on necessaries. Exception: If the lender knows the loan is being made for the purchase of necessaries, and makes sure the money is spent on those necessaries, the minor may be required to repay the loan.
Note: Upon reaching the age of majority (turning 18), the minor may affirm (or ratify) his/her contractual obligation.
Ratification occurs when a minor acts in such a way as to give legal force to a contract hat formally was unenforceable.
Ratification can be express or implied. Express is when the minor writes or state that he/she affirms the contract. Implied ratification occurs when the minor acts in a way that is inconsistent with disaffirmance. For example, if the minor retains possession of the item contracted for (a car, stereo, computer, etc…).
Parental Liability
Parents of minors are not liable for the contracts of their minor children, except those for necessaries that the parents are under a legal obligation to provide.
This is why most businesses require a parent’s co-signature.
Emancipated Minors
When a minor’s parent/guardian relinquishes control over the minor, as is the case when the minor leaves home, the minor may be considered emancipated. In some state, the minor can petition the court to be treated like an adult. If the court grants such a request, the emancipated minor can enter into contracts like an adult, and will be held to his/her contractual commitments.
Intoxicated Persons (Voidable)
Can a drunk enter into a valid and binding contract? Not if the alcohol so impaired his judgment that he did not understand the legal consequence of his actions. If that is the case, the contract is voidable at the option of the intoxicated person.
Unlike minors, however, the intoxicated person must return whatever was contracted for.
As a general rule, it is difficult to get out of a contractual obligation on the basis of drunkenness.
Why do we treat intoxication differently than minority or mental incompetence? Because of the voluntary nature of the cat of getting drunk.
Mental Incompetence (Void or voidable)
A person who has been adjudged mentally incompetent by a court of law and has had a guardian appointed to them cannot enter into a contract. Any contract purported to be entered into by that person is void.
A person who has not been so adjudged but is nonetheless incompetent can enter into the contract, but the contract is voidable if he/she did not understand the nature of the act.
The contract can be disaffirmed at the option of the incompetent person.
Mentally incompetent people, like minors and drunkards, are liable for the reasonable value of any necessaries they contracted for.
Like drunkards, they must return the items contracted for.
If the other party can prove that the incompetent person was lucid at the time the contract was entered into, the contract is not voidable. |
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Term
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Definition
In order for a valid contract to be formed, there must be a meeting of the minds. Each party’s assent to the terms of the contract must therefore be genuine. There are four ways that genuine assent will be found to be lacking: (1) mistake (2) fraud (3) undue influence or (4) duress.
Mistake
There are two types of mistake – unilateral (made by one party) and bilateral (made by both parties).
The general rule is that unilateral mistake will not invalidate a contract. Bilateral mistake, on the other hand, is a valid defense to the enforcement of a contract.
Note: The mistake must be one as to material fact, not as to market value or conditions.
Unilateral Mistake
Occurs when only one party is mistaken as to a material fact – that is, a fact that is vital to the subject matter of the contract.
The mistake does not render the contract unenforceable against the mistaken party.
Suppose I sell my home to Jack. I intend to sell it for $139,500. I make a mistake in writing the offer, however, and write $135,900. Jack accepts my offer, and a contract is formed. I cannot argue that my unilateral mistake as to price is a valid defense to the contract.
Exceptions to General Rule: (1) Where the other party knows or should have known a mistake was made, the mistake may constitute a valid defense or (2) the mistake was a math error and made without gross negligence.
Mutual Mistake
Where both parties to the contract are mistaken as to a material fact, the mistake may constitute a valid defense to the contract.
Case Study – Raffles v. Wichelhaus case (The Two Ships “Peerless”)
Supppose I own a Van Gogh Painting. I sell the painting to Jack for $10,000, who believes the painting to be a Van Gogh. The painting turns out to be a fake. The mutual mistake may serve as a valid defense to the contract.
Fraud
1. misrepresentation of material fact
2. intent to induce reliance
3. inducement of reliance
4. damage
Fraud (a tort) can be asserted by a party to a contract as a defense to the enforcement of the contract. The party asserting the defense can either disaffirm the contract or enforce the contract and collect damages resulting from the fraud.
Undue Influence
Undue influence refers to someone entering into a contract because they have been influenced by someone with great power over them to do so. In other words, they do not have the requisite assent to the contract – no meeting of the minds has taken place.
Undue influence usually occurs in the context of a special relationship, or confidential relationship.
(1) parent/child (2) guardian/ward (3) attorney/client (4) doctor/patient (5) husband/wife.
When one party so overpowers the other such that the weaker party cannot be said to have entered into the contract of his/her own free will, the contract will lack mutual assent on the basis of undue influence.
Duress
Duress refers to one party to a contract being forced into entering the contract.
Blackmail/Extortion
Threat of physical force
Economic Duress is not sufficient!
The consequence of forcing someone to enter into a contract under duress is that the wronged party may, at his/her option, choose to carry out the transaction or rescind (cancel) the contract. |
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Term
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Definition
There are two types of illegal contracts – (1) contracts that violate a statute and (2) contracts that violate public policy.
Contracts that Violate a Statute
1. Usury statutes
Every state has a statute setting the maximum amount of interest lenders (banks, credit card companies, etc…) may charge for loans and/or extensions of credit.
Effect of Usurious Loans
The impact of a usurious loan varies from state to state. In many states, the lender will be allowed to collect the principal amount of the loan, plus a rate of interest up to the legal limit – in other words, the loan itself is not void, but the lender may not benefit from the illegal amount of interest charged.
2. Gambling Statutes
Most states prohibit gambling in some form. The exceptions are state lotteries, casino gambling in some states (Connecticut, New Jersey, Minnesota, Nevada…), horse racing in some states, charitable BINGO, etc….
Contracts entered into for the illegal purpose of gambling are void and unenforceable by either party to the contract.
In other words, you can’t sue your poker buddies for failing to make good on their bets.
3. Sunday Statutes
The most typical of these are state laws prohibiting the sale of alcohol on Sundays. A contract entered into for the sale of alcohol on a Sunday in the state of Massachusetts would therefore be void and unenforceable by either party.
4. Licensing Statutes
Most states have statutes which require certain professionals to have licenses by the states to practice their professions (doctors, lawyers, accountants, stockbrokers, etc…).
When a person enters into a contract with an unlicensed individual, the contract may or may not be enforceable. The general rule is that if the underlying purpose of the licensing statute was to protect the public from unqualified professionals, the contract is illegal and unenforceable. However, if the purpose of the statute is solely to raise revenue for the state through licensure fees (e.g. bar owners), the contract will be enforceable, but the unlicensed person will be fined.
Contracts that Violate Public Policy
There are two types of business contracts which violate public policy – (1) contracts in restraint of trade and (2) contracts which contain unconscionable clause or terms.
1. Contracts in Restraint of Trade
We have a public policy in this country which favors free trade and free competition in the marketplace. Contracts which unreasonably restrain trade may violate this policy and therefore be unenforceable. An example would be a “covenant not to compete.”
A covenant not to compete is often contained in the contract for the sale of a business. Let’s say I run a successful dry-cleaning business. If I sell the business, the buyer may force me to agree not to open another dry-cleaning business around the corner. As long as that agreement is reasonable in scope and duration, the agreement will be enforced.
Covenants not to compete are found in employment contracts as well. In essence, an employee agrees that, for a specified period after his/her employment with the employer is terminated, the employee will not work for a competitor or start a competing business. Again, if the agreement is reasonable in scope and duration, it will be enforceable.
2. Unconscionable Clauses/Terms
As a general rule, courts will not second guess the parties to a contract as to the wisdom of their bargain. Sometimes, however, the bargaining positions of the parties are so vastly unbalanced that a court will step in and declare an unconscionable clause void and unenforceable.
This usually happens where a big company bargains with an unsophisticated individual who is unrepresented by counsel. Such a contract may be termed an “adhesion contract” – which means it was drafted by the party with the superior bargaining position and offered to the weaker party on a “take-it-or-leave-it” basis.
A term of a contract may also be held to be unconscionable if it “shocks the conscience” of the court. An example of this would be Bernie’s selling a $400 refrigerator to a person with a fourth grade education for $2000.
Another type of contract term courts might hold unconscionable and therefore unenforceable are those that are “exculpatory.” Exculpatory clauses are those that release a party from liability, regardless of fault.
Effect of Illegality on Enforceability of Contract
The general rule is that illegal contracts are void – they cannot be enforced by either party. This is true whether or not there has been any performance under the contract. Neither party can sue to require performance. If performance has occurred, neither party can sue to recover payment.
There are several exceptions to this general rule. They are (1) justifiable ignorance of the facts, (2) one of the parties is a member of a protected class, (3) withdrawal from the illegal agreement and (4) fraud, duress or undue influence.
1. Justifiable Ignorance of the Facts
Where one party does not know the contract is illegal, he/she can recover any benefits conferred (payments made, goods tendered, etc…)
2. Members of a Protected Class
If one party to a contract is a member of a protected class as set forth by statute, that party may enforce the contract. An example of this would be an employee who works overtime hours in violation of state law – the employee can enforce the contract against the employer to get paid for the overtime.
Another example would be the purchaser of securities. Under most states’ “blue sky laws” the purchase of securities is heavily regulated by statute – the buyer of those securities can sue to enforce the contract for the purchase/sale of stock even if the contract violated the blue sky laws.
3. Withdrawal from an Illegal Agreement
Where the illegal part of a contract has not yet been performed, either party can withdraw from the agreement and recover the performance (or its value).
An example of this would be an illegal bet placed with a bookie. At any time prior to the payment on the bet, the bettor can demand his/her money back and cancel the wager.
3. Fraud, Duress, Undue Influence
The party subject to such unfair forces can sue to recover under the contract (or sue to enforce the contract). |
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Definition
While most contracts do not have to be in a particular form (written or oral), some contracts are required by statute to be in writing. We call that statute the Statute of Frauds, and every state has its own version of the Statute of Frauds.
The first statute of frauds was passed by the British Parliament in 1677, and was designed to prevent fraudulent testimony of the existence of oral contracts.
Any Statute of Frauds analysis involves two questions:
(1) Does this contract fall within the Statute of Frauds? If yes,
(2) Is the contract in the written form required by the Statute of Frauds?
With regard to the first question, the following five types of contracts fall within the Statute of Frauds (must be in writing to be enforceable):
(1) Contracts for the sale of land/real estate
(2) Contracts that cannot, by their own terms, be performed within one year from the date of formation
(3) Promises to answer for the debt of another (guaranties/sureties)
(4) Promises made in consideration of marriage
(5) Contracts for the sale of goods for over $500.
Contracts for the Sale of Land/Real Estate
Contracts to buy or sell an interest in land or buildings must be in writing to be enforceable.
The reason for this is that land interests are so valuable and important that we must require written evidence of each party’s intent to commit to the contract.
Mortgages and Leases are included in this requirement.
Contracts that Cannot be Performed Within One Year
The test is whether the contract can possibly be performed (fully) within one year of its formation.
A lifetime employment contract? Must be in writing – this can’t be performed in one year.
A contract to paint my house beginning January 1, 2002? Must be in writing – this can’t be performed within one year of the contract’s formation.
A contract to build a deck at my house this summer – Does not have to be in writing – it can be performed in one year.
The reason for the rule is that these contracts, because they can’t be performed within one year, tend to give rise to disputes that occur long after the formation of the contract. In such a case, we need additional proof of the contract in writing because the passage of time will dull the memory of witnesses to the formation of the contract.
Guaranties/Sureties
These are also called “promises to answer for the debt of another.”
The reason for this is that these contracts are particularly vulnerable to fraudulent claims.
Guaranties
A guaranty is a promise to pay a debt in the event that the primary obligor (debtor) defaults. A guarantor’s obligation is secondary to the primary obligor – that is, the guarantor has no obligation whatsoever unless and until the primary debtor fails to pay.
Sureties
A surety, on the other hand, is more like a co-signor. A surety agrees to be equally liable on the debt. The creditor does not have to wait until the primary debtor defaults to collect from a surety – the creditor can elect to collect directly from the surety. A surety assumes a principal or primary obligation.
Both sureties and guaranties must be in writing to be enforceable.
Promises in Consideration of Marriage
This includes promises to pay money to someone to induce them to marry, as well as prenuptial agreements.
As a general rule, a prenuptial agreement should be supported by consideration.
These contracts must be in writing to be enforceable.
Contracts for the Sale of Gods Over $500
The Uniform Commercial Code (UCC) requires that contracts to buy goods for more than $500 must be in writing, and the writing must contain a quantity term.
The writing must also be signed by the party to be charged (the party against whom enforcement is sought.
With regard to the second question, the writing required by the Statute of Frauds is a written memorandum signed by the party to be charged (against whom enforcement is sought).
So we need a writing, and it must be signed by the party against whom enforcement is sought (in other words, the person who is denying the contract).
Will one piece of paper suffice? Yes.
Invoice? Yes.
Check? Yes.
Sales slip? Yes.
How about several documents combined? Yes, that is fine.
Invoice and check? Fine.
The writing need only contain the essential terms of the contract – price, quantity, subject matter, parties.
Remember - both parties do not have to sign!
Only the party trying to deny the contract has to have signed the writing. |
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