Essential Elements to a contract

In general, there must be a meeting of the minds or mutual intent in order to contract.

1. Offer
2. Acceptance
3. Consideration
4. Sufficient Definiteness

1. Notice is not required unless requested by offeree (most not followed)
2. Offeror’s obligation will come to end if not given notice within noticeable time (most commonly followed)
3. If notice is required, not contract exists until notice of performance has been sent.

Quasi Contract (Implied In Law)

In general, a quasi contract is only formed when one or more of the basic contract elements is missing.  It is applied sparingly.

Elements of a quasi contract::

1. Benefit conferred
2. Benefit appreciated
3. Benefit accepted and retained

Donative Promises

Are not enforceable

Even conditional gifts terminate on death of the offeror.

Way to solve donative promise issue?

Things that Kill A Contract

1. Death of promisor
2. Lack of consideration
3. Partial performance (some times)
4. Illegality

Illegality

Contracts for illegal subject matter are not enforceable and the courts generally leave the parties where they find them.

An illegal contract is one whose formation or performance is:

• Criminal
• Tortious
• Against Public Policy

There are also some times when an illegal contract may be not void:

• the promisee has substantially performed  AND
• enforcement is not precluded through public policy AND
• the promisee did not act for the purpose of furthering the improper use OR
• the promisee did not know of the use and the use involved grave social harm

• the promisee was excusably ignorant of certain facts or minor legislation that caused the promisee to violate public policy
• the promisee was not equally wrong with the promisor (i.e. the promisor was the worst offender).

For a promise to be an offer it must:

1. promise must justify the other pasty, as a reasonable person, to conclude that his or her assent is invited and will create a contract
2. must be detailed.

Silent Acceptance

In general, silence is not an acceptable form of acceptance. In rare cases silence is an acceptable acceptance for a bilateral contract - examples:

1. If you do not hear from me by X we have a deal
2. If A and B have a business relationship and A says call me by X if not interested.

• 1. Whether or not it reaches the offeree
  2. Only with regard to those who learn of it
  3. If it is given "equal publicity" to the offer
  4. If it is given "equal publicity" to the offer, or is given the widest practicable publicity under the circumstances

 The promisee has provided a return promise or performance;

•  
  1. The promisee’s return promise or performance must result in a “legal benefit” to promisor and/or a “legal detriment” to promisee;

•  
  1. The promisor’s promise must induce promisee’s return promise or performance. The promisor’s promise and the promisee’s return promise or performance must be made in exchange for each other (a bargained for exchange). A gift is not sufficient to constitute consideration; and

•  
  1. Promisee’s return promise or performance may be given to promisor or to some agreed upon other person and may be given by the promisee or by some other agreed upon person

1. Consideration
2. Moral Obligation
3. Promissory Estoppel*
4. Sealed Ks (generally no longer valid)

Illusory Promises

In general, an illusory promise is one that seems like a promise but really has no commitment.

Illusory promises cannot serve as consideration to bind a bilateral contract.

Illusory promises are seen with language like:

• “as long as”
• “in line with our x”t

Past Consideration

Past consideration and moral obligation is generally NOT valid (with a few exceptions).

1. material benefit rule
2. promises to pay discharged debts (i.e. bankruptcy or statute of limitations)
3. promise to perform voidable duties
4. Ks banned by statute of fraud

Moral Obligation

In general, moral obligation is not valid consideration.  However there are a few exceptions when moral obligation may be valid.

Test to see if moral obligation is valid:

1. A promise
2. Made in recognition of a prior benefit
3. The prior benefit was not a gift
4. Enforcement of the promise is necessary to prevent injustice
5. Promise is not disproportionate to the benefit.

Pre-Existing Duty Rule

In general, you cannot use something you are already obligated to do as consideration for a promise.  However, there are some exceptions.

These exceptions are:

1. Analyzing amendments through the UCC instead of common law (2-209)
2. Using promissory estoppel as a consideration replacement
3. New consideration on amendment by “promising not to breach original contract”
4. Original consideration imported into amendment (WI rule)

Promissory Estoppel

Promissory estoppel started as a substitute for consideration and has expanded, in some jurisdictions, to provide a remedy for various technical difficulties that cause contracts to be unenforceable (for instance: indefiniteness and statute of frauds).

5 prongs of promissory estoppel

1. a promise is made

2. where the promisor reasonable expects action/forbearance from promisee

3. promise induces such action/forbearance from promisee

4. injustice can be avoided by enforcement of promise AND

5. remedy granted may be limited as justice requires

In general, if an agreement is not reasonably certain as to its material terms, it may be found fatally indefinite and therefore not enforceable.

Indefiniteness is evidence of intent not to contract and may make a contract unenforceable if you canot:

1. determine if a breach has occurred AND
2. fashion a remedy

• Silent as to a material term
  • This can be fixed by using a gap filler, usually either (a) a reasonable term of (b) custom and practice.
• Parties purport to agree, but have left a term indefinite
  • Traditionally, these are not fixable and indefinite
  • Modernly, you may be able to clarify through (a) custom and practice, (b) subsequent conduct, or (c)  subsequent clarification.
• Parties agree to agree
  • Traditionally, these contracts are indefinite
  • Alternatively, they may be fixed like the category above.

•  
  •  
    • Subject matter
    • Price
    • Payment terms
    • Quantity
    • Quality
    • Duration
    • Work to be done

Otherwise, immaterial terms that are indefinite do not matter to the overall enforceability of the contract.

• Custom and practice
• Subsequent conduct by the parties
• Subsequent clarification by the parties

Condition

In general, a condition is an event, not certain to occur, which must occur (unless non-occurrence is excused), before performance under a contract becomes due.

Express Conditions?

In general, if something is identified as an express condition and it is not 100% perfectly met the contract is void.  Express conditions are agreed to and imposed by the parties themselves.

When an express condition is met, only the non-breaching party is no longer bound by the contract.  The other party is not relieved of its duty to perform.

Implied in Fact Conditions

In general, an implied in fact condition is created by agreement of the parties but not clearly expressed. It is gathered through interpretation. Implied in fact conditions must be 100% perfectly performed.

Implied in Law (Constructive Conditions)

Time Classification of Conditions:

• Condition precedent: an act of even which, unless excused, must occur before a duty to perform a promise in the agreement arises. (most common)
• Condition subsequent: A condition which, if it occurs, discharges the duty of performance that had (previously) arisen.
• Condition concurrent: Exists where parties are to exchange performances at the same time.

Promise

In general, a promise is a manifestation of intent to act or refrain from acting in a specific way, in return for a commitment.

How do Courts Feel?

If the court has a choice between interpreting something as a promise or something as a condition they will choose the promise because it is the less severe option.

1. To what extent was the contract performed at the time of the breach?
2. Was the breach willful?*
3. Was the breach qualitatively serious?

*If the breach was willful, some jurisdictions refuse to allow breaching party to recover through substantial performance (even if there is a windfall).

Alternately, the court may look to the essential purpose test to see if there is substantial performance in the contract. The essential purpose test checks if the “essential purpose” of the contract was achieved.

Note: Mathematical formulas or percentage complete are not favored by the court, you could be 81% complete and still materially breach.

Note 2: you must be ready, willing, and able to perform when suing for material breach of contract!

Outcomes of material breach analysis:

• Breach was material and cure does not appear likely, you can sue for breach of contract and do not have to perform.
• Breach was immaterial, duty to perform is not discharged, but you can still sue for breach of contract.

Employment Contracts

In general, employment contracts are a succession of continuous unilateral contracts in your pay increment.

Types of Employment Contracts:

1. Formal contracts with set terms
2. Contracts with no set terms

At-Will Employment

At-will employment cures the gap between the formal contract and the indefinite contract in employment.

Progressive Termination

In general, unless it is bound with separate consideration and is separate from the manual, progressive termination policies are only suggestions (with no consideration and disclaimer).

However, if you bind your progressive termination policy through fresh consideration, then you have converted your employment status from at-will to something else.

Employee Handbooks

Employee handbooks can be a contract, but they need to follow the standard contract doctrine to be binding.

There are three views of what an employee handbook can represent:

1. a non-binding communication of employer intent,
2. a binding promise enforceable as a unilateral contract or
3. a binding promise enforceable on the basis of promissory estoppels
4. 
   
5. Note: The best way to make a handbook non binding is through use of explicit and disclaimers.

1. The employment manual constituted an offer:
   1. look to disclaimers to disprove that it was an offer
   2. look to language to see if it was an offer
2. The employee accepted the offer
   1. If the court takes the stance that employment is a “continuous series of unilateral contracts” then the employee has probably accepted (and bound!) the promise.
   2. Else, some other form of acceptance must be found.
3. The employee’s promise was bound by consideration
   1. If the court takes the stance that employment is a “continuous series of unilateral contracts” then consideration is bound by full performance.
   2. Alternatively, we could use promissory estoppels to bind as a cure (if they want).

Mandatory Arbitration

For the most part, unless your employer tricked you into signing the agreement it will be enforceable if it is structurally correct.

To make arbitration binding and convert the at-will status to a term status:

1.  Manual is sufficiently definite in its terms to create an offer;

2.  Manual is communicated to and accepted by the employee; and

3.  Consideration is present.

Options Contracts

In general, an options contract is extended on top of an offer holding the offer open for a definite amount of time.  There are three scenarios that occur with an options contracts:

1. Option not bound by consideration and revoked before acceptance
   1. Revocation is perfectly valid, as options contract was not bound.
2. Option not bound by consideration and accepted before revocation.
   1. Revocation is not valid, as acceptance withdrew power of revocation
   2. You can sue
3. Option contract bound by consideration
   1. No revocation can occur until offer expires
   2. If it does, you can sue.

Modern Majority View (Drennan v. Star Paving)

Under the modern approach, the subcontractor is bound to honor his bid as long as the general contractor does not:

1. Attempt to renegotiate the bid with the subcontractor
2. Attempt to shop the bid
3. Wait outside a reasonable amount of time to inform the subcontractor of the bid

Amendments/Contract Modifications

Under the common law, an amendment is only valid if it follows the rules of a new contract so you need fresh consideration

Under the UCC, an amendment may be brought in without fresh consideration if the parties enter into the amendment with good faith.

Non-Compete Clauses

In general, non-competes are enforceable only if you can show that it is necessary to protect a clear business interest and they are limited in scope.

What types of contracts contain non-competes?

1. Sale of Business
2. Employment

• Goodwill
  • Brand name
  • Reputation
  • Customer Base
• Trade Secrets

• Scope of subject matter AND
• Reasonable geographic scope AND
• Reasonable duration

1. Strike down the whole clause as overbroad
2. Use the “strict blue pencil approach” and strike down some words which leave the sentence intact but limit the scope.
3. Place reasonable restrictions on the overbroad clause.

Contracts of Adhesion

In general, contracts of adhesion are enforceable.

A contract of adhesion is a standard form contract which:

• Is offered on a “take it or leave it” basis AND
• The contracting party is not provided a realistic opportunity to bargain AND
• The contracting party has no realistic choice as to its terms.

1. Where the reasonable expectations test is failed when:
   1. Unequal bargain power exists AND
   2. Clause does not fall within reasonable expectations of weaker party.
2. Where the party would not have agreed to the term if he knew of it
3. Where the contract is unconscionable

Infant Contracts

Infants may always disaffirm any contracts that they enter into unless:

Otherwise provided by statute or public policy.  This disaffirmation can take place either while they are still infants or within a reasonably time of reaching their majority.

Note: Even a parent’s signature on the contract is not likely to stop the contract from being disaffirmable unless you are in CA and go to a court and ratify the contract.

Steps to Disaffirm Contract

1. Infant may disaffirm during infancy or reasonable time after reaching majority
2. May be done orally or in writing
3. Must be of the entire contract

Ratifying an Infant Contract

In general, an infant contract may be ratified and made disaffirm-able:

1. Once the infant reaches majority
2. Without fresh consideration
3. Through one of three means:
   1. Express ratification (may need to be done in writing)
   2. Failing to disaffirm within reasonable time after reaching majority
   3. Through conduct that shows an intent to ratify

Liability for Disaffirmation

In general, an infant is not liable for damages resulting from disaffirmation however there are several exceptions.

When the adult can recover from a disaffirmed contract:

• If contract is for necessary and it would be against public policy to not award damages (i.e. 17 yr old parent providing for child)
• If the contract was for an item, you can get the item (not the value of the item) back.
• Under special New Hampshire Doctrine (Benefit Rule) any benefit received under the contract prior to disaffirmation can be recovered.

What is a Necessary?

There is no fixed interpretation of necessary, but in general it is what the infant needs to maintain their standard of living taking into consideration how much (or little) a guardian will contribute.

Note: you can always argue that the court should use its equitable powers to stop the achieve a “just” result.  But remember, this is a VERY limited method.

Mental Competence

In general, an incompetent can always disaffirm the contract if one of two tests can be passed.

Test 1:  The contract has not yet been performed or restitution can be made.

1. The incompetent (or their estate) can prove incompetence AND
2. Can prove that contract has not yet been performed or restitution can be made.

There are two tests for proving incompetence:

1. The cognitive test: Or that the party could not understand in a “reasonable manner” the manner and consequences of transaction
2. The volitional test: Or that the contracting party lacked effective control over her actions.

Undue Influence

In general, undue influence occurs where:

1. There is a party with a dominant psychological position or a position of trust and confidence
2. A dominant (or trusted) party uses her position to unfairly induce the subservient party to consent to an agreement to which the party would not have otherwise agreed

Duress

In general, duress occurs when the contracting party makes an improper threat to coerce the party into entering into the contract.

Examples of improper threats include:

1. Threats of a tort/crime
2. Threat of criminal prosecution
3. Threat of a civil suit
4. Breach of the fair dealing of an ALREADY existing contract

In general, caveat emptor is still good law! However there are some exceptions and some required disclosures.

Tortious Misrepresentation

Occurs when:

1. A knowing
2. Misrepresentation
3. Of a material fact
4. By the other party to the contract
5. On which the party reasonably relies
6. Which causes damages

Duty to Disclose

The following trigger a duty to disclose:

1. As required by statute (i.e. lemon laws)
2. You may not actively conceal
3. Misleading half truths
4. Duty to updates
5. Duty to disclose latent defects (in some jurisdictions)

Unconscionability

In order for unconscionability to be found, you must have both procedural and substantive unconscionability.  However, courts will take a sliding scale analysis where a lot of one will result in you only needing a little bit of the other.

Procedural

In general, procedural unconscionability occurs when there was:

• Inequality in bargaining power
• Unfair surprise
• A vulnerable individual
• One-sided terms

Substantive

In general, substantive unconscionability occurs when the contract just does not “seem fair”.

When a court finds unconscionability they have three options:

1. Void the whole contract
2. Strike the unconscionable provision
3. Limit the application of the unconscionable clause to avoid an unjust result.

Waivers

In general,how do courts feel about waivers?

In general impracticability occurs when performance becomes commercially impractible (but not impossible, that’s another doctrine) and frustration of purpose occurs when the performance is frustrated (note: this usually deals with promises to pay).

In short:

• If you cannot perform use impracticability
• If you are obliged to pay use frustration

Differences between Impracticability and Frustration of Purpose?

impracticability;

1. Occurrence of a contingency (something unexpected) that rendered performance commercially impracticable;

2. The contingency must have occurred through no fault of the party seeking nullification of performance and after the contract was entered into;

3.  The contingency was a constructive condition precedent to the performance of the contract; and

4. The risk of the contingency must not have been allocated either by agreement or by custom.

Frustration of purpose:

1. Occurrence of a contingency (something unexpected) that substantially frustrates a party’s principal purpose for the contract;

2. The contingency must have occurred through no fault of the party seeking nullification of performance and after the contract was entered into;

3. The contingency was a constructive condition precedent to the performance of the contract; and

4. The risk of the contingency must not have been allocated either by agreement or by custom.

Anticipatory repudiation

In general, if the contracting party manifests an intention to breach, you can sue for breach prior to the breach itself.

If the other party has clearly said that they will repudiate then you can sue for breach.

If the other party has not clearly repudiated you can ask for reassurances:

• If you do not get reassurances, you can treat it as repudiated
• If you do, you must perform.

Parol Evidence

In general, unless there is only partial integration and the evidence you want to bring in does not contradict the existing contract, parol evidence cannot be used unless you are in CA.

Test to determine whether you can use Parol Evidence or not:

• Is there integration?
  • This is a question of law for the courts that is decided by looking at the contract writing itself (though occasionally other evidence may be brought in)
• Is the integration complete or partial?
  • This is a question of law to be decided by the judge.
  • If there is complete integration, then you cannot bring in parol evidnce
  • If there is partial integration, go forward.
• If there is a partial integration, is the parol evidence admissible?
  • Prior inconsistent agreements are not allowed
  • Prior consistent agreements are admissible.

Six Times you can use Parol Evidence?

1. later negotiations
2. evidence to show that there was no valid agreement
3. evidence to interpret the agreement
4. a condition precedent to the agreement
5. consideration recital
6. scrivener's error

Merger Clauses

 In general, merger clauses are enforceable unless one of two exceptions apply.

Exceptions that cause a merger clause to be unenforceable:

1. The agreement is obviously incomplete on its face
2. The merger agreement was included as a result of fraud or mistake

Differences between the UCC and Common Law View?

The CA Exception?

Exceptions to the Parol Evidence Rule

Interpretation

There are eight rules to follow when interpreting things (the eight cannons of interpretation):

1. Specific terms are given greater weight than general terms
2. Separately negotiated terms are given greater weight than standardized terms
3. If there is an inconsistency between typed or handwritten terns and those on a pre-printed form, the typed or handwritten ones win.
4. When in doubt, interpret against the drafter (light most favorable to contracting party)
5. Court prefer to construe terms to be lawful and operative rather than unlawful and inoperative
6. Al terms will be interpreted (as long as possible) as being reasonable.
7. Express terms have greater force than course of performance
8. If one party knows of the other’s meaning, but not vice versa the courts construe the language against those who knew of the misunderstanding and did not correct it.

Mutual Mistake

Mutual mistake occurs when the parties are mistaken about a basic assumption upon which they base their bargain. The contract can generally be voided if a substantially difference exchange of values occurs because of the mistake and the mistake is not allocated by the contract.

To void the contract you must:

1. Show that there is a substantial difference exchange in values due to the mistake AND
2. The mistake was not allocated by the contract

The rationale behind this is that there was no meeting of the minds, the risk of the mistake was not allocated, and neither party was blameworthy in making the mistake.

In general, a contract does not have to be in writing to be enforceable, however there are several exceptions that must be in writing through the Statute of Frauds.

There are six types of contracts covered by the statute of frauds and MUST BE IN SUFFICIENT WRITING AND SIGNED!:

1. Suretyship (a contract that answers for the debt or duty of another)
2. Executor-administrator contracts
3. Marriage contracts
4. Contracts for the sale or interest in real property
5. One-year contracts (those that cannot be enforced from one year of making the contract)
6. Contracts for the sale of goods over $500

• Reasonably identifies the subject matter of the contract
• Is sufficient to indicate that a contract has been made or offered by signer to other party AND
• States with reasonable certainty the essential terms of the unperformed promises in the contract.

Remember the contract must also be signed, where a telegram’s signature may be a valid signature but a fax machine may not be.  Email headers have not yet been decided.

Note: You may have a oral contract as long as it is affirmed in writing.

Though the initial contract must be in writing, you may rescind it orally.

In order for a π to recover special damages, the other party must have actual or constructive notice of the special circumstances.

• Common law states that you  must have given the person notice in order to collect
• Federal common law states that special damages are not recoverable unless the other party has agreed to the special damages.

In order for a liquidated damage to be a penalty:

1. Parties must intended to provide from damages rather than a penalty
2. Anticipated injury caused by breach will be uncertain or difficult to quantify AND
3. Sum stipulated must be a “reasonable” amount.

Note: Courts heavily favor prong 3 of the test.

1. At the time of contract OR
2. At the time of breach

• The amount is disproportionate to the damage
• If, in a housing situation courts prefer damages 10% or under
• If absolutely NO damages occur (usually measured at time of breach) liquidated damage clauses are not enforceable no matter how reasonable

Note: In some jurisdictions, if your breach was willful you have no right to getting the liquidated damages amount back.

In general, damages must be proved with significant certainty in order to be collected.

When proving certainty you must prove:

• Causation
• Amounts
  • Note: Some jurisdictions feel that once you prove causation the burden shifts to the ∆ to prove that damages were not certain.

• You do not have to have exact precision or scientific calculation
• It is difficult to prove damages with certainty in artistic creations
• If you do not prove a stable foundation for a reasonable amount you may only recover nominal damages
• Where damages are based purely on speculation and extrapolation as to future success, the courts are more likely to find reasonable certainty

In general, though Courts say they only allow specific performance if the party seeking damages can show (a) legal remedies are inadequate or (b) irreparable harm if relief not granted Courts will generally give you what you ask for.

When are equitable remedies used?

• When legal remedies are inadequate OR
• When irreparable harm will result if relief not granted

Expectancy

In general, expectancy damages give you the benefit of the bargain. How are expectancy damages measured? How are they proven?

Expectancy = losses occurred + gains prevented – savings made possible

In order to prove expectancy damages the π must prove by the preponderance of the evidence that the damages are reasonably foreseeable.

However, you can recover for probabilistic values and conditional/uncertain values.

• If breacher did not deliver item, cost of replacement item over cost of original bargained for item
• Cost of finding replacement
• If replacement cannot be found, lost profits (possibly, issue with certainty here)

Reliance

In general, reliance damages put you back in the place you started in (as long as no unjust enrichment/windfall occurs).

How do you measure reliance damages? What are the two types?

Reliance = losses caused – loss offset of contract

There are two types of reliance damages:

• Essential
• Incidental

Essential

Essential Damages are those costs that you incurred in order to be ready to perform the contract. (e.g. wiring your kitchen to be ready for a new oven). 

These are always recoverable.

Example of essential reliance damages?

• Deposit
• Things you did to get ready

Incidental

Incidental damages are the costs that you incurred in to take advantage of the contract (e.g. flour so that you can bake with the new oven).

Only some jurisdictions allow you to recover these damages.

Examples?

• Cost of wheat flour
• Lost wages

What is Loss Offset?

Why do we do this?

• Cost of work
• Increased value of item

• Deposit
• Work done

Note: With restitution you do not have to account for the loss offset.

Yes, only in restitution. And only up to the price of the contract.

We do this because unjust enrichment offends contract policy. 

Can the non-breaching party can recover greater damages than the contract?

Note: In some jurisdictions, you can only recover under restitution if the contract has not been fully performed.

Yes.

Note: In some jurisdictions, you can only recover under restitution if the contract has not been fully performed.

Mitigation

You absolutely have a duty to mitigate when reasonable, however there are some limits to the extent which you much mitigate.

In general, you do not have to mitigate if it would cause you:

• Undue risk
• Undue burden
• Undue humiliation

• Require a party to incur unreasonable expenses
• Require a part to commit a wrong

• Different AND/OR (stated as an OR applied as an AND)
• Inferior

You have no duty to mitigate with the party you originally contracted with.

How do you calculate total damages awarded?