CONTRACT
A contract is a legally enforceable agreement.
Promise + Consideration = K
Promise + Detrimental Reliance = K
PROMISE
CONSIDERATION
A promise is the manifestation of intent to act
or refrain from acting in a specified way
To constitute consideration, a performance or
promise must be bargained for, i.e. sought in
exchange for another performance or a return
promise
A promise or performance must offer some
legal detriment, i.e. something of value or
some form of freedom
Each party has the duty to bargain in good
faith
DETRIMENTAL RELIANCE
In some instances, detrimental reliance acts in
place of consideration.
UNENFORCEABLE
DISCRETIONARY
Conditional & Illusory
Promises
An agreement that depends
on the wish, will, or
pleasure of one of the
parties will not be enforced.
No Commitment
One party cannot convert
what both parties knew to be
a joke into a serious
transaction simply by
claiming it to be so.
There must be a meeting of
the minds.
ENFORCEABLE
Vague & Indefinite Terms
Six Ways of Interpreting a Term:
The Courts use these to determine
INTENT
(1) Language of the K
(2) Dictionary
(3) Prior Negotiations Between the
Parties
(4) Trade Usage
(5) Standards Incorporated by
Reference
(6) The Conduct of the Parties
Satisfaction Clauses
Two Categories:
(1) Objective test: Reasonable
person standard, where
“satisfaction” can be asserted to
something measurable
(2) Subjective test: Good faith
standard, where “satisfaction” is
determined by the fancy, taste, or
judgment of the parties
Other relevant factors:
Evidence; Subject Matter
Exclusivity:
Good Faith & Reasonable Efforts
Implied Promises = A promise may be
lacking, and yet the whole K may be
“instinct with an obligation, imperfectly
expressed.” In these situations the
court reads in the promise through
good faith and reasonable efforts by
both parties.
Defenses to K
Formation
An unjustified failure to perform an
absolute duty
(I). Lack of Capacity
(1) Illiteracy without guidance
(2) Mentally Ill
(3) Infant (Minor)
K is voidable if:
- Party is unable to understand in a
reasonable manner
- Party is unable to act in a reasonable manner
(II). Duress
(1) Mere Stress of $ Situation = No Void of K
(Bad public policy)
(2) Assent Induced by Improper Threat =
Voidable K
(3) Business Compulsion creates no other
speedy remedy = Voidable K. i.e. did the
person do what they otherwise would not have
done?
(III). Unconscionable & Unjust
K’s of Gross Inequality are not sustained
Adhesion & Unjust Terms:
K’s offered by the party with more power to the party with weaker power on a take-it-or-leave-it basis.
Rule: Enforceability depends upon the (1) degree of inequality and the (2) social necessity of the
contract.
Unconscionability:
Occurs where there is an absence of meaningful choice on one party, together with contract terms
unreasonably favorable to another party. Must be a necessary act of life, not a luxury or hobby.
Rule: Where the element of unconscionability is present at the time a K is formed, the K is unenforceable. K
must be with the reasonable expectations of the weaker party [substantive] to be enforceable. Conduct is
also considered [procedural].
NOTE: Both substantive and procedural unconscionability must be shown for a K to be unenforceable.
Defenses to K
Formation (Continued)
An unjustified failure to perform an absolute duty
(IV). Fraud & Misrepresentation
(A) Nondisclosure = Recission of K
(B) Partial Disclosure believed to be Full
Disclosure = Promisor is Liable
Rule: If the promisee acted in reliance, then
there is no K and the Promisor is liable.
Nondisclosure of knowledge of a defect that
creates misrepresentation is illegal. There is a
duty to disclose if lack of disclosure creates
reliance.
(V).
Release
Rule: When one party’s obligation to another party is
extinguished, usually through a K clause.
To be valid and enforceable the release must:
(1) Clearly, unambiguously, and explicitly express the
specific intent of the subscribing parties
(2) Be distinguished from the rest of the contract
language when signed.
(3) Notify the releasor of the effects of signing
(4) Remain within the realm of known risks, i.e. those
reasonably foreseeable to the acts the release is
meant to protect.
(VI). Mistake
If the expressions of the parties are capable of two different and equally reasonable interpretations, and
neither one negligently misled the other, there is no contract. Parties are bound by the reasonable
meaning of what they said.
Mutual Mistake:
The Court offers NO REMEDY for cases of mutual mistake.
Latent Ambiguity = A problem that was hidden before a certain event that is essential to the contract. Parole
Evidence (Extrinsic Evidence) = Can be used to clear up a latent ambiguity. Think chicken/cotton shipping
case.
(1) Was the mistake as to a basic assumption or essential term of the contract?
Yes = K is voidable; No = K is enforceable.
(2) If liability can be determined the courts consider:
(i) Element of Risk for each party
(ii) Fraud of Quasi-Fraud
(iii) Negligence
Unilateral Mistake:
(1) General Unilateral = When through fraud or mistake one party is misled, the K must be revised on the
side of the injured party. If the other party knew or had reason to know of the mistake and did not
disclose it, the K is unenforceable.
(2) Scribner’s Error = If the parties have agreed to terms, and only the written document is defective, a
meeting of minds has occurred and the contract is enforceable on original understood terms.
NOTE: Contract is voidable if one party does not bear risk of mistake. Also note that risk is allocated
depending on fairness; the court will also see whether risk has been allocated in the contract itself.
Basic Remedies
Compensatory Damages
When a person makes a promise, the promisor undertakes
the promised performance or a sum or money that will
place the promisee in the same position as they would
have been had the promise been performed.
Expectation
Positive: What the injured party would
have made in profit had the K been
performed.
Rule: The law is meant to place
compensate the injured party for the
benefits he would have gained in the
contract, not to place the injured party in a
better position than they would have been
in had they performed the K.
Reliance
Negative: Returns the injured party to
before the K was made.
Rule: Wasted expenditure can be
recovered when it is wasted by reason of
the defendant’s breach of K. If one party
knows expenses exist as a result of their
agreement to K, but breaches anyway, that
party is liable for the expenses of the
injured party.
KP – Cost of Goods Sold = Damages
Restitution
Negative: Getting back the benefits
conferred. “Disgorging” the benefits
conferred.
A court may award damages in an attempt to
return to the injured party any value that it
may have conferred on the breaching party.
This interest is distinguished from quantum
meruit because restitution can only be given
for breach of K.
Fair Market Value of benefit conferred is
returned.
General v. Consequential Damages
General Damages:
Incidental damages resulting from the seller’s
breach including those commercially
reasonable.
Consequential Damages:
(1) In a sellers breach: Any loss resulting from
general or particular requirements and needs
that the seller had reason to know at the time of
K and could not have reasonably prevented; (2)
Injury to person or property directly resulting from
a breach of K.
To recover consequential damages:
(1) The damages must flow naturally from the
breach
(2) Both parties must be aware of the damages
and assume the risk of those damages at the
time of K
Remedies: How the Law Enforces Promises
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Punitive Damages
Almost never recoverable for
breach of contract.
Only if compensatory damages are
inadequate.
Exist to punish/deter the
wrongdoer, considered
inappropriate for contract cases.
SPECIFIC RELIEF: Granted when legal
remedy is inadequate.
(UCC 2-719)
INJUNCTION
Granted IF:
 Special circumstances to prevent
unfair competition (anti-competition
clauses
 Unfair trading of secrets
 Unique goods and services
 Limited to Employment Contracts
 Public interest is at harm
 Irreparable harm where monetary
damages is not enough
 If costs of remedy damages exceed
cost of injunction (Walgreens)
 Temporary/Permanent?
SPECIFIC
PERFORMANCE
Easier to
get for Sale
of Goods
Contract
Granted IF:
 There is a breach
 Remedy at law is inadequate (UCC)
 Performance is practical
 Courts can supervise
 Special Circumstances
 Contract is clear and valid
 Uniqueness makes it impossible to assess
damages
Not Granted IF:
 Inconvenient and Expensive
 Impractical
 Contract too vague
 Project too complex
 No Special Circumstances
Alternative
Remedies
When basic remedies are not enough
Arbitration
Is there an arbitration clause?
Did both parties agree to arbitration? If
Yes…
Arbitration over litigation:
 Faster
 Cheaper
 Rules of evidence don’t apply
 Prevents class-action
 Avoids a jury
Reasons for appeal:
1. Fraud or corruption
2. Award is irrational
3. Award is against public policy
4. Hearing is postponed for no reason
Liquidated Damages
Specified damages for breach of K to be
given even if no actual damages occur:
Penalty or Reasonable estimate?
Only obtainable if:
1. Damages are too difficult to ascertain at
the time K was formed
2. Amount agreed upon by the parties was a
reasonable forecast of compensatory
damages
Quantum Meruit
Only when unjust enrichment occurs outside of a
contract
Must be the reasonable value of goods and
services conferred.
- A benefit conferred on D by P
- Appreciation or knowledge by D of the benefit
- Acceptance or retention of the benefit by D
under circumstances
Two ways of measuring unjust enrichment:
1. What the non-breaching party received
2. What the breaching party received
Under CA law, a breacher cannot recover under
QM.
Tort
Provides remedies for civil wrongdoings not
arising out of contractual obligation
Kinds of cases: personal injury, outrageous
conduct, outrage, special relationships,
insurance.
AVOIDABLE CONSEQUENCES : DUTY TO MITIGATE DAMAGES
Injured party should do whatever it reasonably can to improve all reasonable and proper
opportunities to lessen injury.
Non-breaching party cannot recover for damages it could have reasonable avoided following
notice that the other party is repudiating the contract. Restatements 350.
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Construction K Mitigation
Once contract has been breached nonbreacher should not be allowed to pile up
damages.
Stop building when they tell you to stop.
Remedy is to treat contract as broken
when receives notice and sue for the
recovery of such damages as he may
have sustained from breach.
Ex. Luten Bridge
Construction:
KP - Cost of Completion (expectation)
Or KRate for completed part + Lost Profit
(reliance)
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Sale of Goods Mitigation
If lost volume seller: UCC 2-708: If the
measure of damages proved (KPrice
– Market Price) is inadequate to put
seller in as good a position as
performance would have done,
seller’s lost profit on the sale is an
appropriate measure.
o Expectation Interest
Protected
Sale of Goods:
Seller: K Price – Market Price
Buyer: Cover Price – Kprice
Employment K Mitigation
Employee has to show that he was actively looking for another job after employment contract
was breached.
Must prove there was no other comparable employment.
o The employee’s rejection of or failure to seek other available employment of a
different or inferior kind may NOT be resorted to in order to mitigate damages.
(Shirley McLain)
Can collect excess damages with the difference between salaries for both jobs. (Employee)
Money needs to comparable, type of work, seniority (how much input you’ll have),
reputation, location and skill set.
Employement:
Employer: Replacement K – Breached K
Employee: KPrice – 2nd Job Earnings (Mitigation)
Limits on
Promise
Legal Limits
If a contract is immoral, unfair, or illegal, then it is
unenforceable and against public policy:
 Illegal on face
 Illegal in performance
 Illegal in procurement
The illegality must be of a substantial degree to prove no K.
For a K to be enforceable:
 No violation of public policy
 No criminal activity
Relationships
Positive Law = Public Policy Limits on Contract
Restatement § 178
(1) A promise is unenforceable if legislation makes it so, or if its
enforcement is clearly outweighed in the circumstances
because of public policy.
(2) In weighing enforcement courts examine:
(i) The parties justified expectations
(ii) Any forfeiture that would result if
enforcement were denied
(iii) Special public interest in enforcement of a
term.
(3) In weighing public policy:
(i) The strength of the relevant policy
(ii) The likelihood that refusal to enforce will
further that policy
(iii) The seriousness of misconduct
(iv) The connection between the misconduct and
the promise
Parent-to-Child
(1) Extrinsic evidence of
a binding agreement
must be shown
(2) Evidence must be
express: clear and
convincing to prove K
(3) Circumstances are
considered
Secret Service
K is not enforceable if:
 Litigation discloses confidential
matters
 Litigation might have even a slight
chance of impairing or
undermining covert
operations
Attorney – Client
Limited to Quantum Meruit for the
value of services performed by
attorney when client discharges
attorney
Spousal
(Some states have a palimony rule)
Property rights established in a pre-nuptial agreement are enforceable
Spousal support waivers and pre-nuptial agreements are not in violation of public
policy and are not per se unenforceable. Judicial discretion is applied to determine
enforceability of K
Unmarried cohabitants can sue only under Quantum Meruit because no marriage K
exists. Occurs if one party retains an unreasonable amount of property that was gained
by the efforts of both parties.
Consideration
§ 71 Restatement
(1) For consideration, a performance or promise must be bargained for.
(2) A performance or promise is bargained for if it is sought by the promisor
in exchange for his promise, and is given by the promisee in exchange for
that promise.
(3) A performance may be:
- An act other than a promise
- Forbearance
- The creation, modification, or destruction of a legal relationship
(I). Bargain v. Gift Promise
(II). Adequate Consideration
An unbargained for promise, unless
enforceable for some other reason, will be
a gift promise and will not be
enforceable.
While the law does not question the
adequacy of consideration, there must
be value to the buyer.
Novel ideas are not required.
There are no additional requirements of:
- A gain
- Equivalent value
- Mutuality of obligation
Prior to delivery of the gift, the promise can
be withdrawn.
A discretionary policy also has an
obligation to act in good faith, and this is
consideration.
In an exclusivity K, parties must act in
good faith for consideration to be
adequate. Parties must have valid
business reasons for varying a
requirements K.
(II.) Past Consideration & Moral Obligation
Past Consideration:
No valid consideration is bargained for because a promise is made in return for a detriment already
suffered by the promisee. To be valid, there must exist new consideration.
Moral Obligation:
Is sufficient consideration for an express promise only so far as there exists another good or valuable
consideration at some point
Exceptions:
- Debts (1) barred by the statute of limitations; (2) incurred by infants; (3) bankruptcy debts
- Where one party has received a material benefit (such as life or a hand)
Consideration
(Continued)
(IV). Action or Forbearance from Reliance
§ 74 Restatement
Forbearance to assert a claim that proves to be invalid is not
consideration unless:
(a) the claim is doubtful because of uncertainty as to the law
(b) the forbearing party believes that the claim may be fairly
determined to be valid
(VI). Form & Enforceability
If the plaintiff believes in good faith that they could have brought
a claim but did not file suit in exchange for something else, that
good faith agreement will be enforced.
DETRIMENTAL RELIANCE:
In some instances, if one party relied on the promise of another
party and thus did or did not do something because of that
promise, the promise is enforceable even though it did not have
bargained for consideration
Unbargained-For Reliance:
(1) Must be reasonable
(2) Must be foreseeable
(V). Pre-Existing Duty
A promise to do something one is already obligated to do, or forbearing to do what they are not legally entitled to
do. There is no contract in cases of pre-existing duty because there is no bargained for exchange of
consideration. One party must already do something.
Contract Modification:
(1) New Consideration. Any change in an existing K must have new consideration to support it. In such a case,
the K is continued, not ended. (= more compensation for more hours worked)
(2) Mythical Intermediate K. Employment K’s. (a) Old K (b) is terminated by consent of both parties (c) and a new
K is executed in its place. The mutual promise to terminate is consideration (Intermediate K), and to re-contract
is again consideration. Usually occurs in one moment. (= pay raise for same work hours).
Actions Speak Louder Than Words (N.O.M. K’s):
(i) The pattern of conduct between two parties may can amount to the oral modification of a K.
(ii) Conduct as oral modification may amount to a waiver of some right by a party
Settlements of Debt & Compromise:
The difference between the two depends upon the intent of the parties.
(A) Accord & Satisfaction = A compromise providing for the future acceptance of a stated performance in
satisfaction of the existing claim.
(B) Substituted Contract = A compromise agreement itself that is accepted as a substitution and
extinguishment of the existing claim.
An Accord is more likely if:
(1) The original duty was one to pay money; (2) if the issue is undisputed; (3) if it was liquidated; (4) if it was
matured