1. CONTRACTS

2. FORMATION (Continued) Conditions Third Party Interests DEFECTS Statuteof Frauds Capacity/Illegality Meeting of the Minds 3. FORMATION - CONDITIONS 4. CONDITIONS Last class covered the elements necessaryto make a contract. 1. Offer 2. Consideration 3. Acceptance 5. CONDITIONS This section concerns WHEN and HOWperformance will be carried out. While not necessary to any contract, manycontracts contain conditions. 6. CONDITIONS Book Definition: An event that may or maynot happen, but which the rest of theperformance of the contract rests. Restatement: an event, not certain tooccur, which must occur, unless its non-occurrence is excused, before performanceunder a contract becomes due. 7. CONDITIONS A condition is different from a covenant A covenant is the promise upon which thecontract rests. What a party to the contract has promised todo. 8. CONDITIONS How do you tell the difference? You have to do some reasonable interpretation. Ifthere is doubt, a court will treat it as acovenant. Conditions are distinguishable in part becausethey are NOT promises. 9. CONDITIONS TYPES OF CONDITIONS Condition Precedent Condition Subsequent Concurrent Condition 10. CONDITIONS Condition Precedent: an event which musttake place before a party to a contract mustperform or do their part http://legal-dictionary.thefreedictionary.com/condition+precedent 11. CONDITIONS Condition Subsequent: a happeningwhich terminates the duty of a party toperform or do his/her part. http://legal-dictionary.thefreedictionary.com/condition+subsequent 12. CONDITIONS How do you excuse performance after it hasalready occurred? You undo it or you stop the continuingperformance 13. CONDITIONS Condition Subsequent Examples Returningmerchandise to a store By returning the merchandise with a receipt , tags and in packaging (condition subsequent) the customer is excused from performance (payment) Alimony payments Husband is under a duty to pay until and unless wife remarries (condition subsequent). 14. CONDITIONS Conditions can be express or implied. Express: conditions stated in the contract. Implied: not stated but arise anyway for one oftwo reasons. 15. CONDITIONS Implied Conditions 1.Implied in Fact: Conditions that must exists in order for the terms of the contract to make sense. 2. Implied in Law: Conditions imposed by the court to ensure fairness and justice. Dutyof good faith and fair dealing. You cannot undermine another partys interests. 16. CONDITIONS Implied in fact examples: That the parties will be alive to perform on thecontract Real estate taxes are paid on a property to bepurchased. 17. CONDITIONS IMPLIED IN LAW EXAMPLE Fergus contracts to provide consulting services for a flatfee of $1,000. After Fergus performs the services, theother party attempts to pay with 1,000 Canadian Dollars.Both Fergus and the client live in Florida, but the writtenagreement does not specifically state a type of currency.Fergus files suit, asking the judge to impose a implied-in-law condition on their agreement and to order theclient to pay in American dollars even though the contractdid not specify it. http://law-dictionary.clearpointlaw.com/i/implied-in-law- condition_Obl.aspx 18. CONDITIONS ANOTHER NOTE ON IMPLIED IN LAWCONDITIONS Ifyou ever hear someone use the termtechnically, it should be a red flag. That person is probably trying to undermineanothers interests and frustrate thepurpose/benefit of the contract. 19. CONDITIONS 1. Condition versus Covenant 2. Types of Conditions Precedent, subsequent, concurrent 3. How creates Express, Implied in Fact, Implied in Law 20. FORMATION - THIRD PARTY INTERESTS 21. THIRD PARTY INTERESTSIn some instances, there are parties to thecontract other than the offeree and offeror.In some contracts, there is a third partybeneficiary. 22. THIRD PARTY INTERESTS Third Party Beneficiary: A person, not aparty to the contract, who stands to receivethe benefit of performance of the contract. 23. THIRD PARTY INTERESTSExample: Grandma enters into a contractwith Oldfield to purchase a Jaguarautomobile to be given to grandchild as agraduation present. If Oldfield takes a downpayment and then refuses to go through withthe sale, grandchild may sue Oldfield forspecific performance of the contract as athird-party beneficiary. 24. THIRD PARTY INTERESTS Most important right conferred upon the thirdparty beneficiary is the right to sue forbreach of contract. 25. THIRD PARTY INTERESTS This is important because, normally, ifsomeone has no privity , then they have nostanding to sue to enforce a contract. 26. THIRD PARTY INTERESTS Privity: connection or mutual interestbetween parties. The term is particularlyimportant in the law of contracts, whichrequires that there be "privity" if one party toa contract can enforce the contract by alawsuit against the other party. 27. THIRD PARTY INTERESTS Thus, a tenant of a buyer of real propertycannot sue the former owner (seller) of theproperty for failure to make repairsguaranteed by the land sales contractbetween seller and buyer since the tenantwas not "in privity" with the seller. http://legal-dictionary.thefreedictionary.com/privity 28. THIRD PARTY INTERESTS IMPORTANT: The third party benefit musthave been intended. There is no right to sue if you are anIncidental Beneficiary (someone whounintentionally derives a benefit from thecontract) 29. THIRD PARTY INTERESTS There are two types of intended beneficiaries Creditors: A party to whom a debt is owed. Donees: A party to whom a gift is given. 30. THIRD PARTY INTERESTS Does it matter whether an intendedbeneficiary is a creditor or a donee? Note really. They are both intended. 31. THIRD PARTY INTERESTS The right to sue as an intended third partybeneficiary is still subject to one more issue. The right must be vested. 32. THIRD PARTY INTERESTS Vested: Having a present right to receive abenefit of the performance when it becomesdue. This term is used frequently in many areas ofthe law. Here it is relatively simple, the 3rd party musthave the present right to received the benefitand know of the benefit. 33. THIRD PARTY INTERESTS In shortAn intended and vested third party beneficiaryhas the right to sue to enforce a contract 34. THIRD PARTY INTERESTS Assignment and Delegation It is possible to later alter a contract so thatan obligation to be performed, or a benefit tobe received, flows to a third party. 35. THIRD PARTY INTERESTS Assignment: The transfer of the rights toreceive a benefit of performance under acontract. You give away your benefit to a third party. 36. THIRD PARTY INTERESTS Delegation: The transfer ofduties/obligations to perform under thecontract. You get someone else to perform for you. 37. THIRD PARTY INTERESTS Assignor/Assignee Obligor Delegant/Delegator Delegate/DelegateeI will not ask you to define these terms on anexam but I may use them in questions so youshould be familiar enough with them tounderstand what I am saying. 38. THIRD PARTY INTERESTS PRACTICE POINT: You can make a contract non-delegable ornon-assignable. It is often desirable to make it non-assignable. 39. THIRD PARTY INTERESTS EXAMPLES A sublease: Mary is moving for a new job but has atwo year lease. She delegates her obligation to payto someone else in return for possession of theapartment. A mortgage assignment: If or when you own ahome, you will find that the bank will sell yourmortgage to another bank or institution almostimmediately and it may get sold several more times.The bank has assigned its right to repayment inexchange for money. 40. THIRD PARTY INTERESTS KEY DIFFERENCE Whenyou are a delegant/delegator, you are still obligated to perform if the delegate/delegatee does not. Whenyou are an assignor, you effectively step out of the contract and no longer have an interest (cant sue). 41. THIRD PARTY INTERESTS KEY DIFFERENCE (cont.) Why is that? Because in a delegation, there is still a futurepromise to perform. In an assignment, there isnothing left for the assignor to get or do. Notice that this is why it may be preferable to restrictthe ability to assign whereas restricting delegation isnot as important since you get two parties on thehook to perform. 42. THIRD PARTY INTERESTS What you need to know: Definitions Third Party Beneficiary Intended Third Party Beneficiary Vested Assignment v Delegation That an intended and vested third partybeneficiary has the right to sue to enforce acontract. The results of assignation vs delegation. 43. DEFECTS - STATUTE OF FRAUDS 44. DEFECTS STATUTE OF FRAUDS As we discussed in the previous class,contracts do not always have to be in writing. They can be verbal They can be implied by facts or actions even But some contracts MUST be in writingotherwise a court will not enforce them 45. DEFECTS STATUTE OF FRAUDS The Statute of Frauds is the term we use todescribe the rule. It is not actually a statute! Why call it a statute? Old English lawpassed over the USA via common law eventhough it was a statute in England. 46. DEFECTS STATUTE OF FRAUDS The rule was originally evidentiary and hadto raised as a defense. Meaning you still had a contract, just nosatisfactory way to prove it in court once adefendant showed that the content allegedfell within the rule. Why? 47. DEFECTS STATUTE OF FRAUDS Why evidentiary? Why have the rule at all? Contract law likes certainty. In each area (except perhaps the UCC) thereis a perceived need to have certainty, or aneasy way to provide it. 48. DEFECTS STATUTE OF FRAUDS FIVE APPLICATIONS Transfer of Real Property Interests Contracts not performable within one year Contracts in consideration of Marriage Sureties and guarantees (answering the debt ofanother) Sale of goods over $500 49. DEFECTS STATUTE OF FRAUDS Ohio has tinkered with the Statute of frauds R.C. 1335 et. seq. Do not worry about it for this class other thatyou should be aware of the tinkering if youcome across it in practice. 50. DEFECTS STATUTE OF FRAUDS Analyzing the statute of frauds is a 3 stepprocess 1. Does the content of the contract fall within thestatute? 2. Does the content satisfy the statute (i.e. is it inwriting?) 3. Are there any way around the statute in theparticular case? 51. DEFECTS STATUTE OF FRAUDS A. Transfers of Real Property This is easy if you are just selling a house. But, for those of you who have taken a realproperty class, you know there are all sorts ofinterests in real property that may be conveyed. So what qualifies? 52. DEFECTS STATUTE OF FRAUDS A. Transfers of Real Property What qualifies Mortgages Leasesover 1 year Real estate co-op transfers Easments Lien transfers 53. DEFECTS STATUTE OF FRAUDS A. Transfers of Property What does NOT qualify. Factpatterns where a person sells land to perform ona contract that may be performed without the sale (Aagrees to pay B $20,000 for tuition. To pay, Aintends to sell her house.) 54. DEFECTS STATUTE OF FRAUDS A. Transfers of Property What does NOT qualify. Contracts to remove something from the land that donot grant an ownership interest in the land. Jane lets ABC company extract oil or harvest tress fora set price. 55. DEFECTS STATUTE OF FRAUDS Why have this rule on real property transfersat all?1. Because they are easily recordable.2. The common law obsession with real property and its importance to wealth. 56. DEFECTS STATUTE OF FRAUDS B. CONTRACTS OVER 1 YEAR Key: It must be impossible to perform within one year, not just contemplated or unlikely. Practice note: watch for conditions or seemingly ancillary requirements under a contract. Non-compete agreements in an employment contract 57. DEFECTS STATUTE OF FRAUDS Why have this part of the rule? Because courts recognized that memoriescan fade, documents are lost and witnessesdisapear. If the parties know it is going totake a long time to perform, they should takeadequate precaution. 58. DEFECTS STATUTE OF FRAUDS C. Marriage Contracts PrenuptualAgreements Antenuptual AgreementsPractice Note: Watch out for sloppy agreementsabout how people are going to divide money thatdo not actually reference marriage as theconsideration. 59. DEFECTS STATUTE OF FRAUDS D. Answering the debt of another This most often arises when people try toadministrate the estate of a loved one without legalhelp. Example: Grandpa dies leaving some estate but a lot ofdebt. Granddaughter, who wants to bury him properlyagrees to pay the debts when the creditors call. Example: Co-signing a loan for junior. 60. DEFECTS STATUTE OF FRAUDS E. Sale of Goods Valued over $500 This is a UCC addition and applies to merchants. However, the writing requirement is loosened toinclude any writing sufficient to to indicate that acontract for sale has been made.Acheck! Signing a name on a credit cardreceipt! 61. DEFECTS STATUTE OF FRAUDS Way around the statute Performance. If the aggrieved party (1) hasperformed all or part of its obligation, (2) suffereda detriment, and (3) the performance isunequivocally linked to the contract, then a courtmay fashion a remedy. The decision to provide a remedy is done on acase by case basis. (Not exactly where youwant to be!) 62. DEFECTS - ABSENCE OF A MEETING OF THE MINDS 63. ABSENCE OF A MEETING OF THE MINDS It should seem obvious that a contract mustinvolve a meeting of the minds since everycontract needs an offer and acceptance. If you have no agreement, then you have nocontract. 64. ABSENCE OF A MEETING OF THE MINDS This section deals with those situationswhere one or more parties were mistakenabout a material term in the contract Or Situations where one party was improperlypressured to enter into the contract. 65. ABSENCE OF A MEETING OF THE MINDS There are five situations where a court willdetermine that an otherwise valid lookingcontract in unenforceable for a failure of ameeting of the minds. 66. ABSENCE OF A MEETING OF THE MINDS 1. Mistake 2. Duress 3. Undue Influence 4. Fraud/Misrepresentation 5. Unconscionability 67. ABSENCE OF A MEETING OF THE MINDS Mistake: A mistake can be unilateral ormutual.Aunilateral mistake: An error made by only oneparty.A mutual mistake: An error made by both parties. 68. ABSENCE OF A MEETING OF THE MINDS Unilateral Mistake: Generally not avoidable because they arenormally subjective (i.e. the mistaken partysassertion cannot be verified other than by theirown self serving assertion) Contractlaw generally does not fix poorjudgment and bad deals. 69. ABSENCE OF A MEETING OF THE MINDS Unilateral Mistake Thereare a few circumstances where a court willlet a unilateral mistake void a contract. Whenthe mistake is (1) Objectively reasonableand (2) detectable or obvious. 70. ABSENCE OF A MEETING OF THE MINDS Unilateral Mistake This generally really obvious. Example: Bob submits a construction bid for$200,000. All other bids were for $2,000,000.Bobs secretary missed a zero. The customertries to accept Bobs bid. A court will not enforce this contract. 71. ABSENCE OF A MEETING OF THE MINDS Unilateral Mistake: Bobs mistake was objectively reasonable. Youcan see that it was incorrect without having totake Bobs word for it. Bobs mistake was also easily detectable, in factobvious, to the customer. The customerprobably acted on the mistake to get an unfairdeal. 72. ABSENCE OF A MEETING OF THE MINDS Unilateral Mistake: Why avoid a unilateral mistake ABSENCE OF AMEETING OF THE MINDS? Because it is abouthonesty, fair business dealing and good faith. 73. ABSENCE OF A MEETING OF THE MINDS Unilateral Mistake Ifthe error created a $1.7 million bid because hissecretary made a computational error by leavingoff the cost of bricks, the court would NOT avoidthe contract. Itis not necessarily objectively reasonable AND itis not necessarily detectable (certainly notobvious). 74. ABSENCE OF A MEETING OF THE MINDS Mutual Mistake: Bothparties do not are mistaken about the subject matter/nature of the contract (even if they are making the same exact mistake) 75. ABSENCE OF A MEETING OF THE MINDS Mutual Mistake: If there is a mutual mistake, then either partycan avoid the contract IF the following apply 1. The mistake relates to a material aspect of thecontract. 2. The mistake has a detrimental effect on one orboth parties. 3. The mistake could not have been foreseen (i.e. itis a big surprise) 76. ABSENCE OF A MEETING OF THE MINDS Mutual Mistake NOTE on materiality Book definition of Material: a term ismaterial if it is important to the partysdecision whether or not to enter into thecontract. 77. ABSENCE OF A MEETING OF THE MINDS Mutual Mistake Three general types Mistake on Subject Matter existence Mistake on Ownership Mistake on Subject Matter quality 78. ABSENCE OF A MEETING OF THE MINDS Mutual Mistake Mistake of SubjectMatter Existence. The goods at issue must exist at the time ofentering into the contract. Bookexample: contract for timber on remoteland that already burned down. 79. ABSENCE OF A MEETING OF THE MINDS Mutual Mistake Mistake of Ownership The party supplying goods must have the legal title to convey. Bookexample: It turns out that the landowner does not own all or a portion of the land conveyed (mistaken survey). 80. ABSENCE OF A MEETING OF THE MINDS Mutual Mistake Mistake of Quality The goods must be of the quality describedwithin the contract. Book Example: the timber on the land isinadequate to build with. 81. ABSENCE OF A MEETING OF THE MINDS PRACTICE NOTE: If the quality is variableand not described specifically in the contract,then you will not get relief. The other party isgoing to claim that it is a unilateral mistake. ALSO, if the purchaser had the opportunity toinspect and did not, there may be anassumption of the risk argument. 82. ABSENCE OF A MEETING OF THE MINDS Mistake Remember: A court remedy for a mutualmistake or unilateral mistake is going to beequitable. They are going to look at fairness and may onlyavoid or reform portions of the contract. Equitable relief is discretionary and there isgreat discretion in the remedy. 83. ABSENCE OF A MEETING OF THE MINDS The next four categories deal, on onelevel or another, with bad action by oneparty. While mistake could be innocent thesedefects are not. 84. ABSENCE OF A MEETING OF THE MINDS Duress: Unreasonable or unscrupulousmanipulation of a person to force him toagree to the terms of an agreement he wouldotherwise not do. Think threat of harm PhysicalDuress Mental Duress Economic Duress 85. ABSENCE OF A MEETING OF THE MINDS Undue Influence: The use of a closepersonal or fiduciary relationship to apersonal advantage to gain assent to termsthat the party otherwise would not haveagreed to. Think abuse of trust. 86. ABSENCE OF A MEETING OF THE MINDS Fraud and Misrepresentation Bothare similar, however fraud requires intent. Elements 1. A false statement made to the other party 2. regarding a material fact 3. with the intent to deceive (only for fraud) 4. reliance on the statement by the innocent party 5. reliance harms the innocent party 87. ABSENCE OF A MEETING OF THE MINDS Fraud and Misrepresentation There are some instances where the failure todisclose can constitute misrepresentation or fraud. In some cases there is an affirmative duty todisclose conditions. If there is an affirmative duty to disclose, a failure todo so will be treated as meeting the first element ofmisrepresentation or fraud. 88. ABSENCE OF A MEETING OF THE MINDS Fraud and Misrepresentation Notice that a failure to disclose requiressome element of knowledge. Failure otdisclose what you dont know, does notcount. 89. ABSENCE OF A MEETING OF THE MINDS Fraud and Misrepresentation The most common example is a real estatesale. You sell a home, there is a statute requiringyou to fill out a residential disclosure form. 90. ABSENCE OF A MEETING OF THE MINDS Unconscionability Yourbook punts on this terms and uses Justice Potter Stewarts quote on obscenity. I know it when I see it. 91. ABSENCE OF A MEETING OF THE MINDS Unconscionability in Ohio Deutsche Bank Natl. Trust Co. v. Pevarski, ___ N.E.2d ___, 187Ohio App.3d 455, 2010-Ohio-785. (Ohio App. 2010), 29-32. generally been recognized to include an absence of meaningfulchoice on the part of one of the parties together with contract termswhich are unreasonably favorable to the other party Id. at 30. 92. ABSENCE OF A MEETING OF THE MINDS Unconscionability in Ohio The unconscionability doctrine consists of two prongs: (1)substantive unconscionability, i.e., unfair and unreasonable contractterms, and (2) procedural unconscionability, i.e., individualizedcircumstances surrounding parties to a contract such that no voluntarymeeting of the minds was possible. Id. at 31 (quoting Dorsey v.Contemporary Obstetrics & Gynecology, Inc. (1996), 113 Ohio App.3d75, 80, 680 N.E.2d 240. 93. ABSENCE OF A MEETING OF THE MINDSWilliams v. Walker-Thomas Furniture Co., 350 F.2d445 (D.C. Cir. 1965). In this case, the defendant, aretail furniture store, sold multiple items to a customerover the course of several years. The payment plancontract was written so that none of the furniture wasconsidered paid for until all of it was paid for. Whenthe plaintiff failed to make payments on the lastfurniture item, the furniture store attempted torepossess all of the furniture, not just the last onepurchased. The court ruled that the lower court couldrule the contract unconscionable and refuse toenforce it, and returned the case to the lower court todecide whether or not the contract was in factunconscionable 94. ABSENCE OF A MEETING OF THE MINDS Unconscionability in practice Look for commercially unreasonable terms Provided on a take it or leave it basis. To someone under some sort of outsideduress Ifit was duress from the offending party then it isa duress issue! 95. DEFECTS - RULES OF CONSTRUCTION 96. RULES OF CONSTRUCTION Once validity is challenged, we must look athow the courts will interpret the contract. A party asserts one the defects we havetalked about and the court has to interpretthe contract terms to see if the defectapplies. How does it do that? 97. RULES OF CONSTRUCTION Contracts are supposed to be interpreted bythe same set of rules each time in order toprovide certainty. For example, you will look to the plainmeaning of a term first before apply otherrules of interpretation. 98. RULES OF CONSTRUCTION Four Corners Doctrine: Wheneverpossible, a court should interpret a contractbased upon the terms contained in thecontract only. Plain Meaning Rule: terms get their usualand ordinary terms unless redefinedspecifically. This rule prevents lawyers fromoverlawyering. 99. RULES OF CONSTRUCTION Specific language will trump generallanguage. Last in time First in right: the mostcurrent activity or change is the mostreflective of the intent of the parties(important in verbal contracts). 100. RULES OF CONSTRUCTION Ambiguous terms resolved against thedrafter as he or she was the party mostable to avoid the problem PRACTICENOTE: Most important in insurancecontracts: All insurance contracts are interpretedin favor of the insured if there is vague language.Never take an insurance companys assertion asto what it meant. 101. RULES OF CONSTRUCTION A UCC issue BusinessCustom and Trade Usage A court will look at the following actions outsidethe four corners of a contract when we aredealing with merchants. 102. RULES OF CONSTRUCTION Course of Dealing: Actions taken by the parties in performing of similar transactions. Course of Performance: Actions taken by the parties in performing this particular transaction. Usage of Trade: Actions taken generally by similar parties in similar transactions. 103. RULES OF CONSTRUCTION Why? 1.Repetitive nature of merchant dealings allows for more certainty. 2.Allows for more fluid and faster business transactions. 104. RULES OF CONSTRUCTION Parol Evidence Rule: The doctrine thatexcludes certain oral testimony offered asproof of the terms of the contract. 105. RULES OF CONSTRUCTION Parol Evidence Rule All contradictory evidence is inadmissible. All explanatory evidence is admissible. In simple terms: You can testify as to what aterm means but you cannot testify that you cameto a different understanding. 106. RULES OF CONSTRUCTION An issue with complete or incompletecontracts. Some contracts are open ended. Theparties realize that there are more terms tonegotiate. For example: some home constructioncontracts. A contract can be completely or partiallyintegrated. 107. RULES OF CONSTRUCTION Complete Integration: All of thecontemplated terms of the transaction areincluded in the contract. Partial Integration: The essential terms areincluded but not necessarily all. 108. RULES OF CONSTRUCTION Parol evidence (i.e. supplementalagreements that complete the remainingterms of the contract) is allowed to prove theelements of a contract that is only partiallyintegrated. This makes basic sense. You can provideoral testimony to prove terms that are notcontained within a contract that clearly wasnot intended to include all of the terms. 109. RULES OF CONSTRUCTION Parol Evidence is also admissible for thefollowing reasons To prove a defect To show a breachThe book overly complicates this section by talkingabout explanatory evidence and technical termsboth of which are admissible as explanatory termsalready! 110. RULES OF CONSTRUCTION So if you want the contract to contain all ofthe terms SAY SO!!! Merger Clause: Language that states thatthe parties intend to exclude all outsideevidence relating to the terms of the contractbecause all terms are included within thecontract. Take the guesswork out of it. 111. FAILURE TO PERFORM - BREACH 112. BREACH Book Definition: A partys performance thatdeviates from the required performanceobligations under the contract. (too wordy) 113. BREACH Better definition: [F]ailing to performany term of a contract, written or oral,without a legitimate legal excuse. http://legal-dictionary.thefreedictionary.com/breach+of+contract 114. BREACH This section concerns what happens AFTERwe have determined that there is (1) a validcontract, (2) free of defects and (3) withoutdefenses to performance and then a partyfails to perform. 115. BREACH We know from our review of contractformation that performance and payment arenot always instantaneous. Contracts may contemplate performanceover years. 116. BREACH So what do you do if one party believes theother is not going to perform its end of thebargain but that performance is not yetrequired? The party has not yet been harmed. 117. BREACH Generally, where the harm has not yetoccurred, a court will not hear a casebecause the harm is speculative. 118. BREACH However, in certain circumstance, and generallyconfined to contract law, a party can sue foranticipatory breach. Defined: when a party to a contract repudiates(reneges on) his/her obligations under thatcontract before fully performing thoseobligations. http://legal- dictionary.thefreedictionary.com/anticipatory+breach 119. BREACH Under what circumstances can a party suefor anticipatory breach? When there is an anticipatory repudiation. Words or actions from a party to a contract thatclearly and unequivocally state the intent not tohonor its contractual obligations before the timeof performance has arrived. 120. BREACH There are three types of anticipatoryrepudiation that will give rise to an immediateright to commence a suit for anticipatorybreach. 121. BREACH 1. Unequivocal statement of repudiation. 2. Transfer of interest in the subject matter 3. Affirmative acts that repudiate the contract. 122. BREACH Do not confuse anticipatory repudiation with arequest for a change in the contract terms. Parties often try to modify the contract basedupon changing circumstances. This is not arepudiation. Also notice that a request to change AFTER thecontract is valid is not the same as acounteroffer. 123. BREACH The aggrieved party has multiple options. 1. Cancel the contract 2. Ignore the repudiation 3. Sue!Practice note: clients come to law firms thinking theyare going to sue someone. They need to carefullyconsider whether it is worth it. Just because you havean immediate right to sue does not mean that it still willnot take 1-2 years and lots of money to win. Perhapsthe first two options make more financial sense. 124. BREACH Just because a term of a contract has beenviolated (i.e. a breach), does not mean aparty will have a successful suit. The breach must be material. 125. BREACH Book definition of Material revisited: a termis material if it is important to the partysdecision whether or not to enter into thecontract. 126. BREACH The book goes through a bunch of factorsregarding what is material. Deprivedbenefit Adequate compensation Potential to Cure Standards of good faith and fair dealing 127. BREACH My advice, Try to determine if the breach is trivial and whetherthere is any amount of actual loss. For example: A contractor finishes a renovation 1week late but there was no particular reason why therenovation had to be done at a certain time. This is difference than a contractor finishing a projecta week late and the homeowner loses theopportunity to sell. 128. BREACH PRACTICE NOTE: If you want something ina contract to be material, then say it. Failure to perform [by this date/to theseexact specifications/etc.] constitutes amaterial breach of the terms of this contract. Remember also, time is of the essence. 129. BREACH Up until now, we have talked about contractsas a single transaction. Many, if not most contract, involve multipletransactions consisting of multiple types ofperformance and benefits. 130. BREACH Courts will look to salvage what they can of acontract. If a contract is severable/divisible then acourt will compartmentalize the terms andsave those terms that are unaffected by thebreach. 131. BREACH What if a contractor agrees to renovate abathroom for $4000 (at cost) along with hisrenovation of a kitchen for $20,000 ($4000profit) and then the homeowner decides shedoes not want the kitchen renovation butwants the bathroom? 132. BREACH A court will probably not divide this contractbecause the intended benefit for thecontractor would be frustrated. However, do you really want to be in thissituation of litigating this? 133. BREACH The answer: A non-severability clause. Example: This contract is to be construed as awhole, and all parts of it are to be read andconstrued together. If any part of this contract shallbe adjudged by any court of competent jurisdiction tobe invalid, the remainder of this contract shall beinvalidated. 134. BREACH In other circumstances, you want to keep acontract. For example, if you have anongoing services contract, you can stillmaintain the benefits of the contract even ifsome of you more ancillary terms (arbitration,forum selection, interest rates, etc.) areinvalid. 135. BREACH The answer: A severability clause! If any portion of this Agreement is found invalid orunenforceable, such decision does not invalidate theremaining provisions of this Agreement unlessenforcement would frustrate the Purpose of theAgreement set forth at the outset of this Agreement.If a court determines that a portion of this Agreementcould be valid if it was limited, then such provisionshould be interpreted to be limited as necessary for itto become valid. 136. BREACH Similarly to the motivation to have aseverable contract, a party may want towaive a breach. Why? Because the party may still receivesufficient benefit to make the partialperformance worthwhile. 137. BREACH The waiver must be knowing andintentional. If it is, then a court will generally determinethat the portion of the contracted waived butenforce the rest of the terms as if theoffending term did not exist. 138. BREACH SUMMARY Breach Anticipatory breach Options upon anticipatory breach Materiality Severability Waiver 139. FAILURE TO PERFORM - EXCUSE 140. EXCUSE There are certain real world situations wherecourts will excuse the performance of acontract. 141. EXCUSE 1. Impracticality 2. Impossibility 3. Frustrated Purpose 4. Prevented Performance/Voluntary disablement 5. Party insolvency 142. EXCUSE Impracticality When there is an unforeseen excessive andunreasonable cost a court may excuseperformance Most importantly, fluctuations in prices and financesare not unforeseen. Look for a total surprise. Not that different from amutual mistake! In fact, both arguments shouldnormally be considered together (two bites at theapple) 143. EXCUSE Impossibility3 situations 1. Death of a party 2. Destruction of the subject matter 3. Supervening illegality Sounds a lot like issues discussed fortermination of an offer however this situationis after a contract as been formed. 144. EXCUSE Impossibility Death NOTE:A contract can always specify that theobligations survive the death of a party OR it couldspecify that the obligation CANNOT. 145. EXCUSE Impossibility Subject Matter Destruction Notethat the destruction should not be foreseeable Force Majeur 146. EXCUSE Impossibility SuperveningIllegality Remember this from before The subject matter of the contract becomes illegal afterwards. This is similar to the concepts expressed in the termination of offer section but occurs after the contract is entered into. 147. EXCUSE Frustration of purpose Changes in circumstances surrounding thecontract render the performance of the termsuseless in relation to the reasons for enteringinto the contract. Remember:It must not be foreseeable! 148. EXCUSE Performance Prevented Thisis only an excuse for one party and is the mirror image of a breach/anticipatory repudiation. Whenone party takes steps to preclude the other partys performance or prevent its own performance, the innocent party is excused from performing its obligations. 149. EXCUSE Insolvency If it is clear that a party has no ability to pay its debts, itmay declare bankruptcy. Bankruptcy puts all obligation and payments on hold(known as the bankruptcy stay) and may result intermination of those obligations. If the suspension of the obligations and paymentsamounts to a fofeiture for the innocent party, then theinnocent party has an excuse. This is a VERY vague area. 150. FAILURE TO PERFORM CHANGES BY AGREEMENT 151. CHANGES BY AGREEMENT We previously talked about requests tochange terms in a contract. The freedom to contract necessarily impliesthat the parties can mutually agree to changeor terminate a contract even after it isformed. 152. CHANGES BY AGREEMENT How? 1. Mutual Rescission - call it all off An agreement to terminate the contract and return to the pre-contract status quo 153. CHANGES BY AGREEMENT How? 2. Release settlement Adischarge from contractual obligations that acknowledges the dispute but foregoes contractual remedies. Normally this involves a payment of money. 154. CHANGES BY AGREEMENT How? Accord and Satisfaction modify the 3. agreement to fit the situation at hand. The parties agree not to sue in exchange for accepting the imperfect performance and/or payment. 155. CHANGES BY AGREEMENT How? Substitute Agreement/novation 4. replacement contract with new terms This is different than accord and satisfaction. The terms do not fit the situation at hand but contemplate a situation both different from the original contract and the current status. 156. CHANGES BY AGREEMENT How? 5.Modification a change or addition to the original contract. This keeps the underlying agreement. It is often the simplest may to fix a problem without re-writing and re-negotiating everything. 157. REMEDIES COMPENSATORY DAMAGES 158. COMPENSATORY DAMAGES Contract law provides two types of remedies. 1. Consequential Damages 2. Equity/Quasi Contract remedies 159. COMPENSATORY DAMAGES Compensatory damages place the non-breaching party in a position where the effectof the breach has been neutralized. They are NOT speculative or punitive. Whileyou may find these damages intertwined in acontract case, those awards are based upontort or statutory authority. 160. COMPENSATORY DAMAGES 3 types Expectation: The amount of value expected tobe received. (value of the contract) Restitution: The amount of value provided tothe breaching party. Reliance: The amount of value to reimburse theinnocent party for expenses incurred in preparingto perform. 161. COMPENSATORY DAMAGES Expectation damages are mutuallyexclusive to Restitution and Reliancedamages. You can however recover both Restitutionand Reliance together. 162. COMPENSATORY DAMAGES Why cant you get all types of damages? Because it would result in double/triple recovery. If you receive the benefit of the contract (profit)and then get your costs back, then you areahead of where you would otherwise be. 163. COMPENSATORY DAMAGES How do you/or a court choose? A.First, which one can you calculate? If youcannot get a calculation on it, you cannot ask forit because it is speculative. B. Which one gets you the most money!Normally, expectation damages if calculable. 164. COMPENSATORY DAMAGES Example: ABCcontracts with XYZ to provide produce and distribute marketing materials for XYZ for $10,000 but fails to distribute the materials to the agreed upon community resulting in a breach by ABC. Expectation damages cannot be calculated because it is not clear how effective the marketing materials would have been. They are speculative. 165. COMPENSATORY DAMAGES Reverse example: ABC contracts with XYZ to provide produce anddistribute marketing materials for XYZ for $10,000. ABCperforms on it end of the bargain for a cost of $7000 butXYZ fails to pay. Expectation damages are calculable ($10,000 -$3,000)*and not speculative. *do not use this formula alone to calculate damages as it assumes thatcertain other factors are not present for the sake of simplicity inexplanation. This is meant to show what the expectation damages are,not the ultimate amount recovered as you will see shortly. 166. COMPENSATORY DAMAGES There are other calculable damage issues. Mitigation Consequential/Incidental damages 167. COMPENSATORY DAMAGES Mitigation Everyparty is under a duty to mitigate itsdamages through reasonable efforts. Example:Bob leases an apartment for 1 year at$500 a month to Amy who moves out after 3months and stops paying. Bob is under a duty totry to release that apartment. If he does so 3months later, he is only entitled to the 3 monthsrent in between ($1500). 168. COMPENSATORY DAMAGES Mitigation Another example: John contract to put a new roofon Amys house. After taking off the old roof, Johnquits breaching the contract. Amy does nothingabout the roof issue and a severe storm comesthrough weeks later leaving interior damage andbegins the fostering of mold. Amy still waits a monthbefore getting a new roofer. Amy is under a duty to hire someone to get a newroof on in a reasonable amount of time. John maynot be liable for the storm damage and very likely isnot liable for the mold. 169. COMPENSATORY DAMAGES Consequential Damages Damages resulting from the breach that are natural and foreseeable results of the breaching partys actions. Previous example: Storm damage and mold are consequential damages. Ignore the difference with incidental damages for this class. 170. COMPENSATORY DAMAGES PRACTICE NOTE: Consequential damagesare normally covered by contractors generalliability policies (because they are accidental)but contractual compensatory damages arealmost never covered by a traditional policy. If you want an insurance company to pay andyou represent Amy against John, focus on theconsequential damages. At the very least, donot forget to inquire about the possibility of theirexistence. 171. COMPENSATORY DAMAGES Your book provides a formula for calculatingdamages. Value + Expenses + Losses Mitigation Received Value = DamagesV +E+LMR=D 172. COMPENSATORY DAMAGES Previous example ABC contracts with XYZ to provide produce anddistribute marketing materials for XYZ for $10,000. ABCperforms on it end of the bargain for a cost of $7000 butXYZ fails to pay. $10,000+ $0 + $0 - $0 - $0 = $10,000 173. COMPENSATORY DAMAGES Previous example made more complicated ABC contracts with XYZ to provide produce anddistribute marketing materials for XYZ for $10,000. ABCperforms on it end of the but XYZ only pays $5000because it is dissatisfied with the results (although noguarantees were made). ABC is able to stop productionof the materials before the final leaflets are producedsaving $1000 in material costs but incurs a charge fromthe printer of $250. $10,000 + $0 + $250 - $1000 - $5,000 = $4,250 174. COMPENSATORY DAMAGES Other previous example: Bob leases an apartment for 1 year at $500 a month ($6000total) to Amy. Amy moves out after 3 months and stopspaying. Bob is under a duty to try to re-lease that apartment.He does so 3 months later but only after placing a classifiedad in the paper for $50, Hopefully you all instinctively know that he lost three months ofrent at $500 a month and then spent an extra $50 for a totalloss of $1550. The formula $6000+ $50 + $0 - $3000 - $1500 = $6050 4500 = $1550 175. COMPENSATORY DAMAGES Owner hires builder to construct a buldingfor a total price of $200,000. The estimatedtotal cost of construction is $180,000. Theowner breaches by unjustifiably terminatingthe contract when the work is halfcompleted. At the time of termination, theowner has paid the builder $70,000 for workdone, and the builder has spent a total of$95,000 for labor and materials (some ofwhich are incorporated in the partiallycompleted building). After the breach, thebuilder is able to resell $10,000 of materialspurchased for the project. 176. COMPENSATORY DAMAGES Rose hires Fred under a 2 yearemployment contract for a salary of$50,000 per year, payable in installmentsat the end of each month. Six monthsafter Fred starts work, Rose wrongfullydischarges her. Fred looks for work forthree months but is unable to find a job.Finally, Fred hires an employment agency,paying a one time fee of $1,000. Threemonths later, she obtains a job similar tothe one from which she was fired paying$45,000 per year. 177. COMPENSATORY DAMAGESDespite all of this, the freedom tocontract, allows the parties to modify even thedamages allowed. LiquidatedDamages Limited Damages Attorneys fees and costs 178. COMPENSATORY DAMAGES Liquidated Damages Clauses An amount of money agreed upon in the contract as the reasonable estimation of the damages to be recovered. Remember this from torts? Thesecan be advantageous in complicated matters. 179. COMPENSATORY DAMAGES Limitation of Damages The amount of money agreed upon in the original contract as the maximum recovery allowed for a non-breaching party. Book example: Security alarm failure My example: Your homeowners insurance. 180. COMPENSATORY DAMAGES Attorneys fees and costs The general rule (the American Rule) is thateach party pays its own attorneys fees andcosts. However, you can provide that a breaching partymust reimburse these fees. Practice note: Be careful! Is your client morelikely to sue or be sued? 181. REMEDIES EQUITY AND QUASI CONTRACT 182. EQUITY AND QUASI CONTRACT What do you due if you cannot calculatedamages to an objective certainty? You use equity! 183. EQUITY AND QUASI CONTRACT At its most basic, equity is a doctrine of fairnessand justice. Remember how we have been talking aboutdamages in terms of money for the entiresemester? No more 184. EQUITY AND QUASI CONTRACT Several types of equitable remedies Action Damages Injunctions Specific Performance Court Ordered Solutions DeclaratoryJudgment Recission and Restitution Reformation Quasi Contracts PromissoryEstoppel Unjust Enrichment Prevention of equitable remedy UncleanHands 185. EQUITY AND QUASI CONTRACT Injunction: A court order to requires a partyto refrain from acting in a particular way. Elements: Irreparableharm Normally have to prove some probability of success on the merits. (not mentioned in the book) Can be both permanent and temporary. 186. EQUITY AND QUASI CONTRACT Specific Performance:Acourt order that requires a party to perform acertain act in order to prevent harm to therequesting party. It is often appropriate when value cannot bemeasured. One of a kind articles. Think priceless 187. EQUITY AND QUASI CONTRACT Declaratory JudgmentA court decision allocating rights and responsibilities amongst the parties. Ohio Revised Code 2721 et seq. Usedoften in insurance contract disputes. Is this covered? 188. EQUITY AND QUASI CONTRACT Rescission and Restitution Very similar to mutual rescission discussedpreviously. However, there is not mutuality. 189. EQUITY AND QUASI CONTRACT Reformation Similar to accord and satisfaction. This is difficult because it involves a dispute, or atleast non-cooperation, with a courts attempt todetermine that the non-cooperating party did actuallyagree to a change in the terms. The court does not make a new contract, it is merelythe scrivener memorializing the reformed contract. 190. EQUITY AND QUASI CONTRACT Everyones favorite Promissory Estoppel Even when you do not have a valid contract, acourt might treat it like one!!! If a party has (1) relied upon a promise ofanother (2) the promisor knows the promiseewill reasonably rely upon the promise and (3)the promisee incurs a substantial detriment as aresult of that reliance. 191. EQUITY AND QUASI CONTRACT Promissory Estoppel The key here is that there is no actual contractbecause there was no consideration. Stillfairness dictates that a promisor will be heldto his or her promise Bookexample: Renter and her dog. 192. EQUITY AND QUASI CONTRACT Everyones next favorite UnjustEnrichmentA mirror image of Promissory Estoppel Theretention by a party of an unearned andundeserved benefit derived from wrongfulactions. 1.Promise made 2. Intent to induce reliance 3. Promisees actions conferred a benefit on the promisor. 193. EQUITY AND QUASI CONTRACT Example SubcontractorBob is installing a roof forcontractor Rick. Contractor Rick asks Bob to install somewindows. Bob never agrees to a price but figures it willwork its way out. Rick is paid by the homeowner but never paysBob for the windows. 194. THE UNIFORM COMMERCIAL CODE (UCC) 195. UCC There is only so much time in any course Here is what you need to know about theUCC 196. UCC It deals in transaction in goods withmerchants (at least as the seller). It streamlines the process of contractformation by making presumptions basedupon normal business dealings 197. UCC For example Silence can be acceptance Counteroffers and modifications do not terminate offers Commerciallyfair and reasonable warranties are imposed (remember implied warranties of merchantibility and fitness for a particular purpose?) 198. COMMON CONTRACTUAL CLAUSES AND THE CONTRACT DRAFTING ASSIGNMENT 199. DRAFTING ASSIGNMENT Format needs to be clean and readable. There is no magic format that fits all. I have provided several sample contracts ofvarying worth. If you read them you will seeseveral clauses and language that may beworthwhile. 200. DRAFTING ASSIGNMENT Common clauses in contracts Severability Arbitration ForumSelection Choice of law Confidentiality They are common because they are useful! 201. DRAFTING ASSIGNMENT Read the fact pattern What questions do you still have about thefacts? I came up with about 14. 202. DRAFTING ASSIGNMENT1.Do you want an arbitration clause? If so, with who?2.What is the start date of the project?3.What is the end date?4.Is the contract assignable?5.Do you want a forum selection clause?6.Do you want a choice of law clause?7.Should the contract be severable?8.Who provides insurance? What proof is required?9.Is there a liquidated damages clause?10. What is the interest rate for failure to pay?11. When and how is payment due?12. How are you going to deal with changes?13. Is there need for a confidentiality clause?14. Do you want a clause giving the customer the opportunity to negotiate terms ofthe contract? 203. DRAFTING ASSIGNMENT It is highly probable that you will start draftingthis contract and have more factual questions. In real life, you would simply call the client to getthose questions answered. Email me and I will answer those questions andsend the answer to the rest of the class as well. 204. DRAFTING ASSIGNMENT Last week I told you I would give you moretime to complete this. I am giving you until the last Friday of examweek. 2 weeks to finish. You are free toturn it in early next week if you like. APRIL 26 AT 5PM BY EMAIL 205. DRAFTING ASSIGNMENT APRIL 26 2013 AT 5PM 206. DRAFTING ASSIGNMENT Any questions or concerns about theassignment? 207. CLOSING 208. CLOSING Contracts Exam is next week. 209. CLOSING I also appreciate any direct comments thatyou want to make to me. Send email.