LA BAR EXAM CODE III: CONTRACTS

Question 1

I. What are the kinds of contracts in Louisiana?

Answer 1

There are six kinds of contracts in Louisiana: (i) unilateral/bilateral Ks, (ii) onerous/gratuitous Ks, (iii) principal/accessory Ks, (iv) nominate/innominate Ks, (v) commutative K, (vi) aleatory K.

C.UB. PAK. GO. IN. A. Kave.

Question 2

What are unilateral/bilateral Ks?

Answer 2

The distinction drawn between unilateral and bilateral contracts is based on whether one party alone assumes an obligation to another or whether parties assume reciprocal obligations.

If only one party to the contract incurs an obligation and the other party does not assume a reciprocal obligation, the obligation is unilateral.

If both parties to the contract bind themselves reciprocally, the contract is bilateral. Each party in a bilateral contract is both an obligor and an obligee.

Question 3

What are onerous/gratuitous Ks?

Answer 3

The distinction drawn between onerous and gratuitous contracts is based on the reason for the obligor’s obligation.

If the reason why an obligor bound himself was to obtain a benefit for himself, the contract is onerous.

If the reason why an obligor bound himself was to benefit the obligee, the contract is gratuitous.

Question 4

What are principal/accessory Ks?

Answer 4

The distinction drawn between principal and accessory contracts is based on whether the contract was entered into to provide security for another obligation.

A principal contract is a contract whose obligation is secured by an accessory contract.

If the contract was entered into to provide security for the performance of another obligation, the contract is accessory.

Question 5

What are nominate/innominate Ks?

Answer 5

The distinction drawn between nominate and innominate contracts is based on whether the contract has been given a special designation.

A nominate contract is one given a special designation.

An innominate contract is one with no special designation.

Question 6

What is a commutative K?

Answer 6

A commutative contract is one where the performance by one party is correlative to the performance by the other party.

Question 7

What is an aleatory K?

Answer 7

An aleatory contract is one where the performance or extent of performance of any party to the contract depends on an uncertain event (e.g., an insurance contract).

Think, aleatory sounds like alien - that would be pretty uncertain.

Question 8

II. What are the requirements for a valid contract?

Answer 8

In Louisiana, a valid contract requires (i) capacity, (ii) consent, (iii) lawful cause, and (iv) lawful object.

L.O.C.C.C.

Question 9

What is capacity to K?

Answer 9

All persons have contractual capacity except: (i) unemancipated minors, (ii) interdicts, and (iii) persons “deprived of reason” at the time of contracting. A contract entered into by a party without contractual capacity is a relative nullity, but the contract may be rescinded only by the party lacking capacity or his legal representative.

You may assume that an individual has capacity for purposes of the exam, but do not forget to discuss the requirement, as long as the fact pattern does not include any suggestion that the individual is a minor, lacks the mental capacity as an interdict, or is otherwise lacking capacity.

Question 10

What is consent - how is it evidenced?

Answer 10

Consent is evidenced by offer and acceptance.

No formalities are generally required for offer and acceptance.

Offer and acceptance may be made orally, in writing, or by action or inaction manifesting consent.

No formalities are required unless the law so prescribes or the parties have agreed to a certain form.

Question 11

What is an offer?

Answer 11

An offer is the manifestation of intent to contract, with definite or reasonably certain terms, to an offeree.

An offer is personal to the offeree, is not assignable, and expires if either the offeror or the offeree dies or becomes incapacitated before acceptance.

An offer generally is revocable and may be revoked before acceptance.

The revocation must be received before the offer is accepted.

If the offer specifies a period of time for acceptance, it is irrevocable during that time.

If the offeror does not specify a time but intends to give the offeree a period within which to accept, the offer is irrevocable for a reasonable time.

Question 12

How does an offer expire? Recall the differences between revocable and irrevocable offers.

Answer 12

A revocable offer expires if not accepted within a reasonable time.

An irrevocable offer expires if not accepted within the period during which it is irrevocable.

Question 13

What is acceptance?
How is it effective?
What are the ways in which acceptance can be shown (performance, silence)?
What is nonconforming acceptance?

Answer 13

An acceptance is the manifestation of assent to agree to the terms of the offer in the manner required by the offeree.

Acceptance of a revocable offer is effective when the offeree transmits it (mailbox rule), so long as the acceptance is made in a manner and by a medium suggested by the offer or in an any other reasonable manner given the circumstances. Acceptance of an irrevocable offer is effective when the offeror receives it, which occurs when the acceptance comes into the offeror’s possession.

Acceptance can also be made by either commencement or completion of performance. If the offeror invites acceptance by performance and it is contemplated that the performance will be completed if commenced, a contract is formed when performance begins.

If an offer can be accepted only by a completed performance, the offeror cannot revoke the offer once performance has commenced for a reasonable time necessary to complete the performance.

The offeree, however, is not bound to complete the performance he has begun. If the offer is made irrevocable by or is accepted by performance, the offeree must give prompt notice unless the offeror knows or should know that the offeree has commenced performance.

When silence leads the offeror to reasonably believe that the offer has been accepted, the contracted is deemed confected.

An acceptance not in accord with the terms of the offer is a counteroffer (nonconforming acceptance).

Question 14

How does the requirement of “cause” play into a valid K? What is detrimental reliance?

Answer 14

For an obligation to exist, there must be either: (i) a lawful cause (i.e., one not prohibited by law or public policy), or (ii) detrimental reliance.

Cause is the reason why a person obligates himself.

Cause is the functional equivalent of consideration at common law.

Both explain why some promises are enforceable while others are not.

However, cause is not the same as consideration.

A party need not express in his contract why he is binding himself. An obligation is valid even though its cause has not been expressed. A contract in which the parties do not express their true cause is called a simulation.

A promisor can be obligated by a promise under the doctrine of detrimental reliance if:
(i) the promisee relied on the promise to her detriment;
(ii) the promisor knew or should have known that the promisee would so rely; and
(iii) the promisee was reasonable in so relying.

Note that if the promise was a gratuitous one made without required formalities, then the promisee’s reliance is deemed not reasonable. Recovery under this doctrine is discretionary with the court.

Question 15

How does the requirement of “object” play into a valid K?

Answer 15

Parties are free to contract for any object that is lawful, possible, and determined or determinable. An object is possible according to its nature; this relates to physical and moral impossibility, and not the parties’ ability to perform. The object must be determined at least as to kind but the quantity need only be determinable.

Quantity may be determined by the output or the requirements of a party, which must be set in good faith.

Question 16

III. What are the vices of consent?

Answer 16

The vices of consent are: (i) error, (ii) fraud, and (iii) duress.

Question 17

What is an error?
Who are the parties involved?
What is the standard?
What is the result?
What are the damages?

Answer 17

Error is an error of fact. Error may be either unilateral or bilateral.

Consent is vitiated if both parties are in error (bilateral error). Either party may obtain rescission of the contract; in the alternative, the parties may reform the instrument to reflect their true mutual intent.

If only one party is in error (unilateral error), error will vitiate that party’s consent if: (i) it concerns a cause without which the obligation would not have been incurred (a but-for analysis); and (ii) this cause was known or should have been known to the other party.

There are usually no damages for a contract in error. Rescission generally is the only remedy.

Question 18

What is fraud?
What is important to look out for on the exam?
Who are the parties involved?
What is the standard?
What is the result?
What are the damages?

Answer 18

Fraud is a misrepresentation or suppression of the truth made with the intent to obtain an unjust advantage or cause a loss or inconvenience through the other party. Jurisprudence does not distinguish between fraud by commission and fraud by omission.

Standard: The fraud must have substantially influenced consent for the consent to be vitiated.

Fraud does not vitiate consent when a party could have ascertained the truth without difficulty or special skill unless a relation of confidence has reasonably induced a party to rely on the other’s assertions.

Be sure to identify whether the fraudulent misrepresentation or omission was one that the deceived party should have been able to identify through standard due diligence.

Fraud need not concern a but-for cause, as long as it’s substantially influenced consent. There must be reliance on the statement. Fraud may be the result of silence or inaction when the facts justify the imposition of a duty to speak. Fraud committed by a third person vitiates consent if the party not in error knew or should have known of the fraud.

The result of fraud is the contract is a nullity for vices of consent.

Damages are recouped as well as attorney fees, including recovery from a third person.

Question 19

What is duress?
What is important to look for on the exam?
Who are the parties involved?
What is the standard?
What is the result?
What are the damages?

Answer 19

Duress is consent unlawfully obtained from a party who knew the truth but agreed because he felt that he was forced to consent. Duress can come from any individual not necessarily a party, who exerts force to obtain the consent of a party. The standard is that of a reasonable person.

Consent is vitiated when it has been obtained by duress “of such a nature as the cause of reasonable fear of unjust and considerable injury to a party’s person, property, or reputation.”

The feared injury must be unjust and the act must be threatening enough to cause fear and a reasonable person of unjust and considerable injury. “Reasonableness” is determined by taking into account the age, health, disposition, and other personal circumstances of a party threatened with injury.

It is important to remember that in a defense of fraud or duress is not require the fraud or duress to come from another party to the contract. A third party may be responsible for the fraud or duress and this will still vitiate consent.

The result is that the contract is a nullity for vices of consent. Damages may be recovered – they include attorney fees including recovery from the third person.

Question 20

IV. How are Ks interpreted?

Answer 20

When the words of a contract are clear and explicit and do not lead to absurd consequences, no further interpretation may be made in search of the parties intent. Words in a contract are to be given their generally prevailing meaning. Likewise an interpretation should be chosen that renders the contract effective rather than ineffective.

Question 21

V. What is nullity / null contract?

Answer 21

A “null contract” is defined as null if the rquirements for its formation are not met. Nullity can be either absolute or relative.

The distinction between absolute and relative nullity is that a contract is an absolute nullity if it violates a rule of public order. Such a contract cannot be confirmed. An action to annul such a contract does not prescribe.

A contract is relatively null if it violates a rule intended for the protection of a private party (e.g., lack of capacity). A relatively null contract can be confirmed. The nullity may be invoked only by the party whom the rule protects. An action to rescind a relatively null contract prescribes in five years from the time the ground for nullity ceased (e.g., incapacity or duress) or was discovered (e.g., error or fraud).

Nonetheless, the nullity may be raised at any time as a defense to an action based on an absolutely or relatively null contract, even, after the time for the action of annulment has prescribed.

The effects of nullity are that a null contract is deemed never to have existed. If restoration in kind is impossible or impracticable, the court may award damages.

On severability, the nullity of a provision does not render the whole contract null unless, from the nature of the provision or the intention of the parties, it can be presumed that the contract would not have been made without the null provision.

Question 22

VI. What are the effects of conventional obligations? This gets at the effect of law on contracts, the requirement of good faith, and the duty not to breach.

Answer 22

Contracts have the effect of law for the parties and can be dissolved only by consent or for grounds provided by law. Generally, contracts produce effects only for the contracting parties. Contracts produce effects for third persons only when provided by law. For example, a third-party beneficiary contract enables third parties to demand performance from the promisor.

Contracts must be performed in good faith. Failure to comply with the good faith requirement results in greater liability for damages if the contract is breached.

An obligor’s failure to perform can arise in three ways: nonperformance, defective performance, or delay in performance – all of which constitute a contractual breach. An aggrieved obligee is entitled to damages caused by the obligor’s failure to perform. In addition, an aggrieved obligee is entitled to pursue specific performance or dissolution.

Question 23

VII. What are the remedies available to an obligee upon an obligor’s breach?

Answer 23

An aggrieved obligee is entitled to damages caused by the obligor’s failure to perform. In addition, an aggrieved obligee is entitled to pursue specific performance or dissolution.

Again, the obligor is liable for damages when he fails to perform.

Specific performance is available and obligations to deliver a thing, or not to do an act, or to execute an instrument, unless it is impracticable.

According to Louisiana jurisprudence, specific performance is impracticable when it is (i) impossible (ii) greatly disproportionate to the cost suffered (iii) no longer in the obligee’s best interest and (iv) there are negative effects to third persons.

Specific performance is discretionary with the court if the obligation is to do something. If an agreement is enforced due to detrimental reliance, the court may grant damages rather than specific performance and recovery may be limited to the damages suffered as a result of the reliance.

When an obligor fails to perform, the obligee may request judicial dissolution or regard the contract as dissolved, if the circumstances permit (extrajudicial dissolution).

When the obligor fails to perform, the obligee may give notice to perform within a certain time with a warning that the contract will be dissolved if the obligor fails to perform. The noticed time for performance must be reasonable. An obligee may regard a contract as dissolved without giving notice to the obligor if it is evident that the obligor will not perform or if the delayed performance would be of no value to the obligee.

Upon dissolution, the parties are restored to the situation that existed before the contract was made. If restoration is impossible or impracticable, the court may award damages.

Question 24

VIII. What is a simulation?

Answer 24

A simulation occurs when the parties agree that a contract does not express their true intent.

If the true intent is expressed in a separate writing, it is a counter letter.

There are two types of simulations: absolute and relative.

In an absolute simulation, the parties intend that the contract will produce no effects (e.g., a sham sale). It has no effect as between the parties.

In a relative simulation, the parties intend that the contract will produce an effect different from the one recited in the contract (e.g., a donation disguised as a sale). It produces the effect intended between the parties if the requirements for those effects are satisfied.

Question 25

IX. What are revocatory and oblique actions?

Answer 25

In a revocatory action, an obligee may annul an act of the obligor that causes or increases his insolvency and that occurred after the right of the obligee arose.

In an oblique action, an obligee may exercise a right of the obligor if that right is heritable and the obligor’s failure to exercise that right causes or increases his insolvency.

Question 26

X. How are conflict of laws provisions for contracts handled?

Answer 26

An issue concerning conventional obligations is governed by the law of the state whose policies would be most seriously impaired if its law were not applied.

Question 27

XI. What are the special types of contracts from Code III?