Chapters 18 & 19
Contracts in Writing & Third-Party Rights
Hypothetical
On January 2, Wabash Construction Company, a general contractor, executed a
written contract with Anderson Brick, Inc., a subcontractor. The contract relates to a
major “strip mall” building project in Morgantown, and Wabash faces a deadline of
October 31 in its contract with The Mackie Consortium, L.L.C., the owners of the new
mall. In the agreement between Wabash and Anderson, the parties stipulate that “time
is of the essence” in terms of performance of the bricklaying work, and that the
deadline for Anderson’s completion of the bricklaying work is July 15. There is also a
“liquidated damages” clause in the contract between Wabash and Anderson,
indicating that if the work is not completed by July 15, Anderson will pay $2,000 in
damages for every day the bricklaying is not completed beyond July 15.
Anderson does not complete the bricklaying work by July 15. In fact, the project is not
finished until August 30, and Wabash now claims liquidated damages from Anderson in
the amount of $92,000 (representing 46 days beyond the July 15 deadline, multiplied
by $2,000 per day.) Anderson refuses to pay the $92,000, and Wabash sues.
At trial, Anderson’s attorney seeks to introduce the following evidence: 1) the
testimony of Henry Anderson, Anderson’s owner, who is willing to testify under oath that
at the time of the signing of the contract, Wabash’s general manager, Fred Stein, said
“Pay no attention to the July 15 deadline in the contract; if you need more time, all you
have to do is ask;” and 2) a crumpled index card, purportedly in Fred Stein’s
handwriting, indicating “no ‘hard and fast’ deadline on Anderson brick work.”
Should the trial court judge admit the foregoing evidence?
2
Statute of Frauds
o Rule of state law requiring certain types of
contract to be in writing in order to be
enforceable
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Purpose of Statute of Frauds
o Ease contractual negotiations by
requiring sufficient, reliable evidence
to prove existence and specific terms
of contract
o Prevent unreliable, oral evidence
from interfering with contractual
relationship
o Prevent parties from entering into
contracts with which they do not
agree
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Contracts Covered by Statute of Frauds
o Certain types of contracts must be signed
by the party against whom enforcement is
sought to be enforceable.
o To be enforceable, the following types of
contracts must be in writing and signed:
o Contracts that cannot be performed within one
year from the date of their making
o Promises made in consideration of marriage
(Prenuptial agreements)
o Secondary Obligations: Contracts to pay the
debt/default of another party
o Real estate contracts
o Contracts for the sale of goods valued at $500 or
more
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Exceptions to Statute of Frauds Writing
Requirement
o Admission: Statement made in court, under
oath, or at some state during a legal
proceeding in which defendant admits that
oral contract existed (even though contract
was originally required to be in writing)
o Partial Performance: Action of both parties
demonstrate existence of contract
o Promissory Estoppel: Legal enforcement of
otherwise unenforceable contract, due to
party’s detrimental reliance on contract
o Miscellaneous exceptions recognized by
Uniform Commercial Code (UCC):
Examples—Oral contracts between
merchants, oral contracts for customized
(“specially manufactured”) goods
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Statute of Frauds Writing Requirements
o Common Law--Written contract must clearly indicate:
o Parties to contract
o Subject matter/purpose of agreement
o Consideration given by both parties
o Significant terms (Price, quantity, etc.)
o Signature of party plaintiff seeks to hold responsible
under contract (i.e., signature of defendant)
o Uniform Commercial Code (UCC)—Written contract for sale
of goods must include:
o Quantity of goods
o Signature of defendant
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Parol Evidence Rule
o Common law rule stating that oral
evidence of agreement made before
or contemporaneously with written
agreement is inadmissible when
parties intended to have written
agreement be complete and final
version of agreement
o Purpose: Lends stability, predictability
and integrity to written contracts
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Exceptions to Parol Evidence Rule
o Contracts that are subsequently
modified
o Contracts conditioned on orally
agreed-upon terms
o Contracts that are not final, as they
are part written and part oral
o Contracts with ambiguous terms
o Incomplete contracts
o Contracts with obvious typographical
errors
o Voidable or void contracts
o Evidence of prior dealings or usage of
trade
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Integrated Contracts
o Merger Clause: Written contracts
within statute of frauds intended to be
complete and final representation of
parties’ agreement
o General Rule: Integrated contracts
prevent admissibility of parol
evidence
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Statute of Frauds & Parol Evidence Rule
o Parol evidence rule says written
contract cannot be contradicted by
evidence of any prior agreement or
contemporaneous oral agreement;
PER’s exceptions include ambiguity,
course of dealing, mistake, validity of
contract in dispute
o PER is substantive rule of contract
interpretation.
o What constitutes a legally binding
agreement?
o How do we know what the agreement is?
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Electronic Contract/Signature
o Under certain conditions, both federal
and state laws permit contracts to be
formed electronically and allow
electronic signatures to satisfy statute
of frauds’ “writing” and “signature”
requirements.
o Examples – 15 U.S.C. § 7001 et seq.;
California Civil Code § 1633.1 et seq.
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Third-Party Rights Hypothetical
o Barbara Hastings has no children of her own, but she does have a beloved
niece named Ellen Laughridge. Attentive to the future financial needs of Ellen,
Barbara secures a $500,000 life insurance contract from Chameleon
Insurance Company, listing Ellen as the sole beneficiary. Barbara has every
intention to inform Ellen of her new life insurance policy, but “life gets in the
way,” and she neglects to do so.
Hastings dies on January 15, 2005. As part of her estate distribution, Ellen
receives a chest-of-drawers from her dear aunt. On August 29, 2007, while
rearranging her clothing in the chest-of-drawers, Ellen comes upon a secret
compartment. In the secret compartment is an original copy of the life
insurance contract. Ellen is overjoyed to see her name listed as beneficiary,
and she contacts Chameleon Insurance Company immediately.
Upon review of the policy, Chameleon denies coverage. Chameleon’s
claims representative points to Section 15(b) of the policy, which specifically
requires notification of the insured’s death no later than one year after death.
It has been over two years and seven months since Barbara Hastings died.
Will Ellen recover the $500,000 in insurance proceeds? Is it ethical for an
insurance company to deny a claim on the basis of a “technicality?”
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Terminology
o Obligor: Contractual party who owes
duty to other party in privity of contract
o Party who agreed to do something for the
other party
o Obligee: Contractual party owed duty
from other party in privity of contract
o Party who agreed to receive something from
the other party
o Assignment: Transfer of rights under a
contract to a third party
o Assignor: Party to contract who transfers
his/her rights to a third party
o Assignee: Party (not in privity of contract)
who receives transfer of rights to a contract
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Third Party Rights
o Only the Parties to a contract have
rights and liabilities under the
contract.
o Exceptions:
o Assignment or Delegation.
o Third party beneficiary contract.
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Assignments
Transfer of rights in a bilateral contract to
3rd party.
Obligee/
Assignor
Original Contract Formed
Obligor
Assignment
Duties Owed
Assignee
After Assignment
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Assignments
o Rights cannot be assigned:
o If the assignment is contrary to statute.
o Prohibited by law/public policy
o When a contract is personal in nature.
o Assignment materially changes rights or duties of
obligor.
o Rights would increase obligor’s risks/duties
o If the contract stipulates the right cannot be
assigned.
o Valid notice must be given to all parties.
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Delegation
o Delegation: Transfer of duty under a
contract to a third party
o Delegator: Party to a contract who
transfers his/her duty to a third party
o Delegatee: Party (not in privity of
contract) who receives transfer of
duty to a contract
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Third-Party Beneficiary Contracts
o Intended Beneficiary: Third party to contract whom contracting
parties intended to benefit directly from contract. Intended
beneficiaries can sue to enforce contract obligations
o Promisor: Party to contract who made promise that benefits third
party
o Promisee: Party to contract who owes something to promisor in
exchange for promise made to third-party beneficiary
o Creditor beneficiary. Third party who benefits from contract in
which promisor agrees to pay promisee’s debt
o Donee beneficiary: Third party who benefits from contract in which
promisor agrees to give a gift to third party
o Vesting: Maturing of rights, such that a party can legally act on the
rights
o Incidental Beneficiary: Third party who unintentionally gains benefit
from contract between other parties. Contracting parties do not
intend to benefit incidental beneficiary. Incidental beneficiaries
cannot sue to enforce contract obligations
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