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Legal Environment
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Quote of the Day
“A verbal contract isn’t worth the
paper it’s written on.”
Samuel Goldwyn,
Hollywood producer
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2
Legal Environment
The Statute of Frauds
 Many agreements are unenforceable,
unless it, or some memorandum of it, is
in writing and signed.
 Agreements that must be in writing are
those:
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•
•
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For any interest in land
That cannot be performed within one year
To pay the debt of another
Made by an executor of an estate
Made in consideration of marriage; and
For the sale of goods over $500
Legal Environment
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Agreement for Interest in Land
 A contract for interest in land must be in
writing to be enforceable.
• Exception: Full Performance by the Seller
• Exception: Part Performance by the Buyer
– the buyer of land may be able to enforce an oral
contract if she paid part of the price and either
entered the land or made improvements to it.
• Exception: Promissory Estoppel
– If a promisor makes an oral promise that should
reasonably cause the promisee to rely on it, and
the promisee does rely, the promisee may be
able to enforce the promise.
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Legal Environment
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Agreements That Cannot Be
Performed Within One Year
 Unenforceable unless in writing.
Promise to Pay Debt of
Another
 When one person agrees to pay the
debt of another as a favor to that debtor,
it is called a collateral promise and must
be in writing.
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Legal Environment
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Promise Made by and
Executor of an Estate
 An executor’s promise to use her own
funds to pay a debt of the deceased
must be in writing to be enforceable.
Promise Made in
Consideration of Marriage
 Unenforceable unless in writing.
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Legal Environment
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What the Writing Must
Contain
 The contract or memorandum must be
signed by the defendant, and
 It must state with reasonable certainty:
• the name of each party
• the subject matter of the agreement, and
• all of the essential terms and promises.
Click here to go to the internet for samples of written contracts.
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Legal Environment
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Sale of Goods -UCC §2-201(1) - The Basic Rule
 A contract for sale of goods worth $500
or more is not enforceable unless there
is some writing, signed by the
defendant, indicating that the parties
reached an agreement.
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Click to read the Uniform Commercial Code on the internet.
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Legal Environment
Electronic Contracts
 In this age of Internet commerce, the
rules of contracting have to be
interpreted in light of the technology.
• Is an e-mail sufficient to be a writing?
• Is an electronic signature sufficient?
 However, the essential questions are
still the same:
• Did the parties intend to make a deal?
• What were the terms?
• Is there evidence that they both agreed?
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Legal Environment
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Parol Evidence
 Parol evidence refers to anything
(apart from the written contract itself)
that was said, done, or written before
the parties signed the agreement or as
they signed it.
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10
Legal Environment
The Parol Evidence Rule
 When two parties make an integrated
contract, neither one may use parol
evidence to contradict, vary, or add to
its terms.
• Exception: Incomplete or Ambiguous
– If a court determines that a written contract is
incomplete or ambiguous, it will permit parol
evidence.
• Exception: Misrepresentation or Duress
– A court will permit parol evidence of
misrepresentation or duress.
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Legal Environment
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Third Party Beneficiary
Someone who was not a party to the
contract but stands to benefit from it.

An intended beneficiary may enforce a
contract if the parties intended her to benefit
and if either:
• enforcing the promise will satisfy a duty of the
promisee to the beneficiary; or
• the promisee intended to make a gift to the beneficiary.

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Any beneficiary who is not an intended
beneficiary is an incidental beneficiary, and
may not enforce the contract.
Legal Environment
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Assignment and Delegation
 A contracting party may transfer his
rights under the contract, which is
called an assignment of rights.
 A contracting party may transfer her
duties pursuant to the contract, which is
a delegation of duties.
 The assignor is the one making an
assignment and the assignee is the one
receiving an assignment.
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Legal Environment
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Assignment
 Any contractual right may be assigned
unless assignment:
• (a) would substantially change the obligor’s
rights or duties under the contract; or
• (b) is forbidden by law or public policy; or
• (c) is validly precluded by the contract itself.
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Legal Environment
Rights of the Parties after
Assignment
 Once the assignment is made and the
obligor notified, the assignee may
enforce her contractual rights against
the obligor.
 The obligor may generally raise all
defenses against the assignee that she
could have raised against the assignor.
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Legal Environment
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Delegation of Duties
 Most duties are delegable. But
delegation does not by itself relieve the
delegator of his own responsibility to
perform the contract.
 An obligor may delegate unless
• (1) delegation would violate public policy, or
• (2) the contract prohibits delegation, or
• (3) the obligee has a substantial interest in
personal performance by the obligor.
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Legal Environment
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Novation
 A novation is a three-way agreement in
which the obligor delegates all duties to
the delegatee and the obligee agrees to
look only to the delegatee for
performance.
 The obligee releases the obligor from
all liability.
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Legal Environment
Discharge
 A party is discharged when she has no
more duties under a contract.
 Most contracts are discharged by full
performance.
 Sometimes the parties discharge a
contract by agreement.
 Rescind means that they terminate it by
mutual agreement.
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Legal Environment
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Performance
 Strict Performance
• Performance that is exactly what promised;
is usually not expected and failure to do so
does not cause for discharge.
 Substantial Performance
• A party that substantially performs its
obligations will receive the full contract
price, minus the value of any defects.
• A party that fails to perform substantially
receives nothing on the contract and will
only recover the value of the work, if any.
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Legal Environment
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Personal Satisfaction Contracts
 A personal satisfaction contract is one
which the promisee makes a personal,
subjective evaluation of the promisor’s
performance.
• A court uses a subjective standard only if
assessing the work involves feelings, taste,
or judgment and the contract explicitly
demands personal satisfaction.
• In all other cases, a court applies an
objective standard to the decision.
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Legal Environment
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Good Faith
 The Restatement (Second) of
Contracts §205 states: “Every contract
imposes upon each party a duty of
good faith and fair dealings in its
performance and its enforcement.”
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Legal Environment
Time of the Essence
Clauses
 A time of the essence clause will
generally make contract dates strictly
enforceable.
 Merely including a date for performance
does not make time of the essence.
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Legal Environment
Breach
 Material Breach
• Generally courts will discharge only if a
party committed a material breach – one
that causes substantial harm.
 Anticipatory Breach
• Anticipatory breach is committed by one
party making it unmistakably clear that he
will not honor the contract.
 Statute of Limitations
• Will limit the time within which the injured
party may file suit.
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Legal Environment
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Impossibility
 True Impossibility
• Something has happened making it utterly
impossible to fulfill the promise.
 Commercial Impracticability
• Some event has occurred that neither party
anticipated, making the contract extraordinarily difficult and unfair to one party.
 Frustration of Purpose
• Some event has occurred that neither party
anticipated and the contract now has no
value for one party.
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Legal Environment
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Identifying the “Interest”
 Expectation Interest
• Designed to put the injured party in the
position she would have been in had both
sides fully performed their obligations.
 Reliance Interest
• Designed to put the injured party in the
position he would have been in had the
parties never entered into a contract.
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Legal Environment
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Identifying the “Interest” (cont’d)
 Restitution Interest
• Designed to return to the injured party a
benefit that he has conferred on the other
party, which it would be unjust to leave with
that person.
 Equitable Interest
• When money is not sufficient to help the
injured party, a court may order a transfer
of property or may issue an injunction to
prevent a particular action from continuing.
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Legal Environment
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Compensatory Damages
 Compensatory damages are the most
common monetary awards.
 They generally flow directly from the
contract, such as an order to pay what
was promised or to pay for expenses
caused by the breach.
 The injured party must prove the breach
caused damages that can be quantified
with reasonable certainty.
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Legal Environment
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Consequential Damages
 Consequential damages are those
resulting from the unique circumstances
of this injured party.
 Because damage calculation can be
complex, there are companies that
specialize in doing the work on behalf of
litigants or other interested parties.
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Click here for the web page of a damage calculation company.
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Legal Environment
Incidental Damages
 Incidental damages are the relatively
minor costs incurred when the injured
party responds to the breach (obtaining
cover), such as the extra cost of buying
replacement goods.
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Acme agrees to sell
1000 widgets to Big
Bob’s for $1 each,
Big Bob has to
buy 1000 widgets
from ConCo for
Big Bob can recover
incidental damages
of the extra $250
but fails to deliver.
$1.25 each.
from Acme.
Legal Environment
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Equitable Interests
 Specific Performance
• A court will order the parties to perform the
contract only in cases involving the sale of
land or some other asset that is unique.
 Injunction
• An injunction is a court order that requires
someone to do something or refrain from
doing something.
 Reformation
• Reformation is a process in which a court
will partially “re-write” a contract.
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Legal Environment
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Special Issues of Damages
 Mitigation of Damages
• A party may not recover for damages that
could be avoided with reasonable efforts.
 A liquidated damages clause, is a
provision stating in advance how much
a party must pay it if it breaches.
 A court will generally enforce a
liquidated damages clause if :
• (1) at the time of creating the contract it was
very difficult to estimate actual damages, and
• (2) the liquidated amount is reasonable.
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Legal Environment
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“The parties to disputes very
often could have avoided
litigation with a few carefully
crafted sentences. It is worth the
time and effort to write them.”
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Legal Environment
Link to the Internet
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